Question
MMCC is investigating the feasibility of a new line of power mulching tools aimed at the growing number of home composters. Based on exploratory conversations
MMCC is investigating the feasibility of a new line of power mulching tools aimed at the growing number of home composters. Based on exploratory conversations with buyers for large garden shops, it projects unit sales as follows: year 1 = 3,000unit; year 2 = 5,000unit; year 3 = 6,000unit;year 4=6,500unit; year 5=6,000unit; year 6=5,000unit; year 7=4,000unit; year 8=3,000unit. The new power mulcher will be priced to sell at $120 per unit to start.When the competition catches up after three years, however, MMCC anticipates that the price will drop to $110.The power mulcher project will require $20,000 in net working capital at the start. Subsequently, total net working capital at the end of each year will be about15 percent of sales for that year. The variable cost per unit is $60, and total fixed costs are $25,000 per year.It will cost about $800,000 to buy the equipment necessary to begin production. This investment is primarily in industrial equipment and thus qualifies as 7 year MACRS property. The equipment will actually be worth about 20 percent of its cost in eight years, or 0.2x$800,000=$160,000. The relevant tax rate is 21 percent,and the required return in MMCC's stock is 15 percent.
The company intends to finance 30% of this project using debt at a discount rate of 8 percent.
1- Based on this information and using the NPV, should MMCC proceed?
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