Question
Question 2: To capitalize on COVID, Rick has decided to develop a COVID resistant pen. He believes that in the first year of operations that
Question 2:
To capitalize on COVID, Rick has decided to develop a COVID resistant pen. He believes that in the first year of operations that he will be able to sell 6,000 of these specialized pens. The growth of sales is expected to increase 7% each year, but the project will only last for three years because by then COVID (hopefully) will not be an issue. Each pen will initially cost $1.25 to make and will initially be sold for a price of $9.42. Fixed costs are expected to be $35,000. Inflation is expected to be 3% per year. Unit costs, sales price and fixed costs are all expected to increase with inflation. The equipment required to make the pens is expected to cost $35,000 and will have a salvage value of $10,000 at the conclusion of the project. Upfront net working capital required is expected to be $5,000, and thereafter be 10 percent of sales. All net working capital will be recovered at the conclusion of the project. The CCA rate for the equipment is 30% and the tax rate is 22%. The discount rate is 14%. To help in his decision to start the project or not, Rick has already paid a consultant $10,000. However, he would like a second opinion, and thus has asked you to do an analysis.
Note: You should copy and paste your Excel sheet into the Word document. You may size it to fit.
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