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I have attached the question images. Clarion Company is considering an opportunity to produce and sell a revolutionary new smoke detector for homes. To determine
I have attached the question images.
Clarion Company is considering an opportunity to produce and sell a revolutionary new smoke detector for homes. To determine whether this would be a profitable venture, the company has gathered the following data on probable costs and market potential:
- New equipment would have to be acquired to produce the smoke detector. The equipment would cost $220,000 and be usable for 8 years. After 8 years, it would have a salvage value equal to 10% of the original cost.
- Production and sales of the smoke detector would require a working capital investment of $52,000 to finance accounts receivable, inventories, and day-to-day cash needs. This working capital would be released for use elsewhere after 8 years.
- An extensive marketing study projects sales in units over the next 8 years as follows:
Year(s) Sales in Units 1 7,000 2 10,000 3 14,000 4-8 16,000
- The smoke detectors would sell for $50 each; variable costs for production, administration, and sales would be $35 per unit.
- To gain entry into the market, the company would have to advertise heavily in the early years of sales. The advertising program follows:
Year(s) Amount of
Advertising 1-2 $ 81,000 3 61,000 4-8 51,000
- Other fixed costs for salaries, insurance, maintenance, and straight-line depreciation on equipment would total $150,800 per year. (Depreciation is based on cost less salvage value.)
- The company's required rate of return is 7%.
(Ignore income taxes.)
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