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Likes and good comments! RCM is thinking about launching a new product. The company executives have traveled to different cities to understand what the demand
Likes and good comments! RCM is thinking about launching a new product. The company executives have traveled to different cities to understand what the demand of the product will be, and the company has spent $100,000 on those travel expenses. The management think that the product will have a market life of 5 years. The operating revenue is going to be $1 million per year and operating costs will be 60% of that. The company will need a new machine costing $500,000, and the CCA rate is 15%. Further, if the project is launched, the company needs to make an investment in the net working capital of $100,000 right away. The net working remain unchanged through-out the life of the project. At the end of life of the project, the company expects to recover 80% of its investment in the net working capital. In addition, a consulting team was appointed to conduct a study regarding the demand potential of the product. The deal with the consulting company is that they will be only paid the consulting fee ($50,000) if CFR inc undertakes the project and in that case, the consulting team will be paid at the beginning of the project. The company's tax rate is 30%. It is estimated that at the end of the life of the project, the machine will be sold for $200,000. RCM uses only bonds and common stocks to finance its operations and maintains a debt to equity ratio of 1 (i.e. 50% debt, 50% equity). RCM's bonds are currently traded at par, carry a 12% annual coupon, and mature in 10 years. RCM has a beta of 2 . The current market risk premium is 5% and the current risk-free rate is 5%. Use an NPV analysis to determine if the company should launch this oredut
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