Question
SmartView Electronics has decided to sell a new line of televisions. The TVs will sell for $705 per set and have a variable cost of
SmartView Electronics has decided to sell a new line of televisions. The TVs will sell for $705 per set and have a variable cost of $320 per set. The company has spent $200,000 for a marketing study that determined the company will sell 65,000 of these new sets each year for seven years. The marketing study also determined that the company will lose existing sales of 12,000 sets annually of its high-end TV. The high-end TVs sell at $1,300 and have variable costs of $700. The company will also increase sales of its low-end TVs by 11,000 sets annually. The low-end TVs sell for $300 and have variable costs of $125 per set. The fixed costs each year will be $9,800,000. The company has also spent $1,500,000 on research and development for the new TV. The equipment required will cost $35,500,000 and will be depreciated using the 7-year MACRS schedule. The new TVs will also require an increase in net working capital of $1,600,000 that will be returned at the end of the project. The equipment can be sold at the end of seven years for $1,700,000. The tax rate is 26 percent, and the cost of capital is 15 percent.
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Should the project be accepted?
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