Question
company is deciding whether to manufacture a new product or not. The new product is estimated to be in demand for 15 years only. The
company is deciding whether to manufacture a new product or not. The new product is estimated to be in demand for 15 years only. The company expects that Page 2: 50,000 units of the new product can be sold in each of the 15 years. The selling price is expected to be $30 per unit, while variable and fixed costs are estimated to be 50% of the selling price and $400,000 per year, respectively. To start manufacturing the new product, the company needs to purchase a special Page 3: machine costing $1,000,000 initially. The capital cost allowance rate for the machine is 20%, while the company uses the straight-line method to depreciate the machine for accounting purposes. At the end of the 15th year, the estimated residual value of the machine is $120,000. Page 4: In addition, the company will need to contribute $110,000 of net working capital initially, as well as an additional $200,000 of net working capital at the end of the third year. The applicable corporate tax rate is 30%, while the required rate of return is 12% per
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