Question
Given the recent problems with air population in major cities, you decide to start selling a product called Perry-Air, which is canned air. The project
Given the recent problems with air population in major cities, you decide to start selling a product called "Perry-Air," which is canned air. The project life is 6 years. To start the project, you need to buy equipment today for $30,000. The equipment has a salvage value, which is 5% of the cost. You decide to depreciate the cost of equipment following a 5 year MACRS. The project also requires investment in net working capital today for $20,000 and the net working capital grows 10% per year and is fully recovered at the end (i.e. in the last year, the net working capital is zero). You expect that you can sell 10,000 cans the first year and the sales will increase 1,000 per year. The price if canned air is $6 per can. There is a fixed annual cost for production, which is $35,000. Suppose the tax rate is 35%, and investors' required return is 20%. Should you invest this project?
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