Practice Examples for Capital Budgeting

Austin's cell phone manufacturer wants to upgrade their product mix to encompass an exciting new feature on their cell phone. This would require a new high$-$tech machine. You are excited about his new project and are recommending the purchase to your board of directors. Here is the information you have compiled to complete this recommendation:

$\backslash$table$[[$Unit selling price,$$45,],[$Unit variable cost,$$25,],[$Fixed Costs,$$200,000,],[$Depreciation costs,$$35,000,],[$Expected sales,$10,000$ units per year$]]$

According to the information, the project will last $10$ years and require an initial investment of $$800,000,$ depreciated with straight$-$line over the life of the project until the final value is zero. The firm's tax rate is $30\%$ and the required rate of return is $12\%.$ You believe that the variable cost and sales volume may be as much as $10\%$ higher or lower than the initial estimate. Your boss understands the risks but asks you to explain the alternatives in a brief memo to the board. Write a memo to the Board of Directors objectively weighing out the pros and cons of this project and make your recommendation$($s$).$