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The Blackberry Company is considering adding a new line to its product mix, and the capital budgeting analysis is being conducted by Peter Alonso,
The Blackberry Company is considering adding a new line to its product mix, and the capital budgeting analysis is being conducted by Peter Alonso, a recently graduated MBA. The production line would be set up in unused space in Blackberry's main plant. The machinery's invoice price would be approximately $180,000, another $10,000 in shipping charges would be required, and it would cost an additional $30,000 to install the equipment. The machinery has an economic life of 4 years, and Blackberry has obtained a special tax ruling that places the equipment in the MACRS 3-year class. The machinery is expected to have a salvage value of $18,000 after 4 years of use. The new line would generate incremental sales of 1,050 units per year during the life of the project at an incremental cost of $100 per unit in the first year, excluding depreciation. Each unit can be sold for $180 in the first year. The sales price and cost are expected to increase by 3% per year due to inflation. Further, to handle the new line, the firm's net working capital would have to increase by an amount equal to 12% of sales revenues. The firm's tax rate is 26%, and its overall weighted average cost of capital is 10%.
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