Question
Lousiana Inc., will launch its latest addition to its product line next year. Louisiana's Inc.'s managers believe that the company can sell an average of
Lousiana Inc., will launch its latest addition to its product line next year. Louisiana's Inc.'s managers believe that the company can sell an average of 35,000 units of the new product per year. The product will be sold at $25 per unit. Its unit variable cost is estimated at $10.
The new product will require the acquisition of a special equipment costing $300,000 and an increase in working capital of $80,000. The special equipment will have a six-year useful life with no salvage value at the end of six years. When the new product is produced, the company will incur additional fixed costs of $350,000 excluding the depreciation cost of the special equipment.
At the end of the life of the special equipment, the company will stop producing and selling the product. Louisiana, Inc. pays income tax at the rate of 32% of income before tax. For capital budgeting purposes, it uses a hurdle rate of 16%.
What is the net cost of this investment opportunity?
Group of answer choices
$730,000
$80,000
$220,000
$300,000
$380,000
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