The Baldwin Company investigated the marketing potential of brightly colored bowling balls and concluded that the project could achieve a 10-15% market share. The Baldwin Company is now considering investing in a machine to produce bowling balls. The bowling balls would be manufactured in a building owned by the firm and located near Los Angeles. This vacant building and land can be sold for $150,000 after taxes. Working with his staff, Meadows is preparing an analysis of the proposed new product. He summarizes his assumptions as follows: The cost of the bowling machine is $150,000 and it is expected to last five years. After five years, the machine will sell for an estimated price of $50,000. Production per year over the five-year life of the machine is expected to be as follows: 6,000 units, 9,000 units, 15,000 units, 12,000 units, and 8,000 units. The price of bowling balls in the first year will be $20. The bowling ball market is very competitive, so Meadows believes that the price of bowling balls will increase by only 3% per year, compared to the anticipated general inflation rate of 5%. By contrast, the plastic used to produce bowling balls is becoming increasingly expensive. Because of this, production cash outflows are expected to grow by 10% per year. Production costs for the first year will be $12 per unit. The company has determined, based on Baldwin's taxable income, that the appropriate incremental corporate tax rate on the bowling ball project is 33%. Management determines that an initial investment (in year 0) in net working capital of $15,000 is required. Thereafter, the net working capital at the end of each year will equal 10 percent of sales for that year. In the final year of the project, the net working capital will be reduced to zero as the project is completed. In other words, the investment in working capital must be fully recovered at the end of the project's life. Should the project be undertaken?

 Create the same Excel file that we studied in class Net working capital at the end of each year will equal 10 percent of sales for that year. In the final year of the project, the net working capital will be reduced to zero as the project is completed. In other words, the investment in working capital must be fully recovered at the end of the project's life. Should the project be undertaken? Create the same Excel file that we studied in class Net working capital at the end of each year will equal 10 percent of sales for that year. In the final year of the project, the net working capital will be reduced to zero as the project is completed. In other words, the investment in working capital must be fully recovered at the end of the project's life. Should the project be undertaken?

 

5-Year MACRS Depreciation Rates

20,00%

32,00%

19,20%

11,52%

11,52%

5,76%