Could you please walk me through this and help me with certain question please.
Nasco Heating Inc., a producer of heating equipment in Michigan, is currently evaluating the introduction of a new infrared space heater. Several of Nasco's competitors have already entered the quartz in'ared market in response to the public's demand for heating devices that provide soft, moist, safe heat without reducing oxygen and humidity in the heated area. As a result, industry analysts predict high growth in the sales of inated heaters in the years to come. Production facilities for the proposed project will be housed in a currently unused section of Nasco's plant; this section must be renovated upon commencement of the project at a cost of $350,000. Another local company has asked to lease this section of Nasco's plant for $120,000 a year for the next four years. The required production machinery costs $600,000; its shipping cost is estimated to be $10,000, while its installation cost is $40,000. The machinery falls in the 5- year MACRS class, has an economic life of four years, and its salvage value is estimated to be $100,000 after four years of use. At that time however, Nasco plans to use the equipment for a new project. In addition, in each of the rst two years of its life the project will require net working capital level equal to 5 percent of the infrared heater revenues; this net working capital must be available at the end of the year prior to sales. In year three net working capital will remain at its end-ofyear two level, while it will totally vanish at the end of year four. Nasco expects to sell 400,000 units of the new heater in the first year of operations; thereafter unit sales are estimated to grow at a two percent annual rate. If the project is undertaken, production costs and selling price would be $48 and $55 per heater, respectively at current (t = 0) dollars; nevertheless, Nasco estimates that, beginning immediately, price will increase at the ve percent ination rate while production costs will increase at half that rate. Nasco's sales manager is concerned that the introduction of the infrared heater will cannibalize the sales of the rm's existing technology (i.e., radiant and ceramic) heaters. She estimates that existing heater sales will decline by $2,000,000 in the rst year, dropping by an additional two percent annually thereafter. As a result, Nasco's production manager estimates that existing heater production costs will decline by $500,000 in the rst year, falling by an additional one percent annually thereaer. Nasco's weighted average cost of capital (WACC) is 12 percent and its tax rate is 21 percent
