Question
Hunter Ltd is considering whether to invest $9,000 in a five-year marketing project. You are the project manager of this project and you have just
Hunter Ltd is considering whether to invest $9,000 in a five-year marketing project. You are the project manager of this project and you have just gathered the following data and projections relevant to this project:
(1) The unit selling price shall be $10.
(2) Quantity sold for year 1 is 1,000. It is expected that the quantity sold will increase by 100 units per year.
(3) The expected unit variable cost (marketing and overhead) is $5.
(4) The projected fixed costs are $4,500 per year. This will include annual depreciation of $1,500 on the equipment used in this project. No salvage value is expected.
(5) The corporate income tax rate applicable for this project is 20%.
The required rate of return of this project is 14% per year. REQUIRED:
(a) On the basis of the above information, perform relevant calculations to determine the net present value of the project and offer your advice on whether or not the company should go ahead with the project.
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