Jeans Paradise, Inc.,is considering a purchase of new equipment that will cost $600,000. This equipment will produce
Question:
Jeans Paradise, Inc.,is considering a purchase of new equipment that will cost $600,000. This equipment will produce 40,000 pairs of white jeans per year for ten years. The white jeans will be sold at a price of $50 for the first five years and $40 afterwards. Variable costs remain at $10 per pair of jeans during the ten-year period. The equipment will be depreciated at a CCA rate of 30 percent, and the company always expects to have several pieces of equipment in that CCA Class. After ten years, the equipment will be sold for $80,000. A $40.000 initial investment in the net working capital is required, which will be recovered at the end of the project. Jeans Paradise starts selling white jeans, the before-tax operating revenue from the existing sale of its black jeans will decline be $9,000 per year. Jeans Paradise is in a 40 percent tax bracket and has a required return of 16 percent. Should Jeans Paradise start producing the white jeans?(NPV method)