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Cigna Industries makes a line of plastic lawn ornaments in the shape of swans, among a myriad of other products. It is currently considering adding
Cigna Industries makes a line of plastic lawn ornaments in the shape of swans, among a myriad of other products. It is currently considering adding a new line of ornaments -- storks. If it purchases a new machine to make storks, it expects to sell 500 storks at $400 each (the cost per stork is $150) in the first year. Unit sales are expected to increase at an annual rate of 10% per year through the fifth year, after which the line will be discontinued. The unit cost of the storks is expected to increase by 4% annually in years two through five, but Cigna will not increase the selling price because of the fear of competition (be careful -- they are selling more units and the costs to produce them are increasing). For income tax purposes, depre- ciation of the $770,000 machine cost will be based on the straight-line method to a salvage value of $0 over Seven Years!. However, Cigna expects to be able to sell the machine for $70,000 at the end of the fifth year. [Note: In the real world, Cigna would most likely use MACRS percentages that are not straight-line, but straight-line depreciation is easier to use -- be thankful for that!] Cigna Industries is a large, profitable manufacturing company whose average income tax rate is 30%, and whose marginal income tax rate is 35%. Cigna's cost of capital ( MARR) is 14%. Required: Using the Net Present Value (NPV) method, should Cigna make storks
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