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Could anyone please explain this in details! Thank you. 10-21. Expanding a Product Line. Sutherland Company makes office equipment, such as tables, desks, computer equipment
Could anyone please explain this in details! Thank you.
10-21. Expanding a Product Line. Sutherland Company makes office equipment, such as tables, desks, computer equipment consoles, and work tables. The sales manager, Blossom Newman, is trying to decide whether to expand the relatively new computer equipment console product line. The average desk will sell for $300 and has a variable cost of $140 per unit. Volume is expected to be 4,000 units per year for five years. To make the desks, the firm will have to buy additional machinery that will cost $900,000, has a five-year life, and has a $100,000 salvage value net of taxes. Straight-line depreciation is used, and salvage value is ignored in depreciation calculations. Additional fixed cash operating costs will be $200,000 per year. Sutherland has a 40% tax rate, and its cost of capital is 16%. Questions: 1. Using NPV, determine whether the computer console line should be expanded. 2. Compute the payback period. 3. Determine the approximate IRR that the firm expects to earn on the investment. Ignore salvage value Step by Step Solution
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