Question
The Majestic Mulch And Compost Company (MMCC) is investigating the feasibility of a new line of power mulching tools aimed at the growing number of
The Majestic Mulch And Compost Company (MMCC) is investigating the feasibility of a new line of power mulching tools aimed at the growing number of home composters. Based on exploratory conversations with buyers for large garden shops, MMCC projects unit sales as follows:
year unit sales
1 3,000
2 5,000
3 6,000
4 6,500
5 6,000
6 5,000
7 4,000
8 3,000
The new power mulcher will sell for $120 per unit to start. When the competition catches up after three years, however, MMCC anticipates that the price will drop to $110.The power mulcher project will require $20,000 in net working capital at the start. The variable cost per unit is $60, and total fixed costs are $25,000 per year. It will cost about $800,000 to buy the equipment necessary to begin production. This investment is primarily in industrial equipment, which qualifies as seven - year MACRS property. The equipment will actually be worth about 20 percent of its cost in eight years. The relevant tax rate is 34 percent, and the required return is 15 percent. Based on this information, should MMCC proceed?
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