HERE IS HOW INVENTORY IS AFFECTED BY THE 10%

Cleveland Enterprises is considering the addition of a new product line. The firm would not need additional factory space, but it would require the purchase of $1.5 million of equipment installed. The equipment would be depreciated using a 7-year accelerated depreciation schedule. Additional inventory of 10% of the next year's sales would be necessary prior to each year of operation, but the entire value will be recouped at the end of the project. The firm expects to sell 300,000 units during the first year of the project, increasing to 350,000 units during the next three years before decreasing to 100,000 during the fifth and final year of the project. The product is expected to be obsolete at that point. The expected sales price is $10 per unit with a variable cost of $4 per unit during the first year of operations. Fixed costs are estimated at $400,000 throughout the life of the project. The firm's tax rate is 40%. The equipment has an estimated salvage value of $500,000. What is the estimated net present value ofthe project assuming a required retum of 12%? Management of the firm is predicting the possibility of an economic boom during the upcoming years. If so, the projected sales would be 400,000 units per year with a price of $11. However, it would also increase labor costs giving the firm a variable cost per unit of $5. What is the estimated net present value of the project assuming an economic boom