Question
The manager of CTP inc is thinking about launching a new product. The initial investment in equipment and other set-up is $500,000. It has been
The manager of CTP inc is thinking about launching a new product. The initial investment in equipment and other set-up is $500,000. It has been a while since the top management has been thinking about launching this new product. They made several trips to different cities to understand the potential demand, and finally decided to launch this product. Those trips have cost the company about $190,000 so far. The project will have an estimated life of 6 years. The year 1 revenue is expected to be 400,000, and the revenue is expected to remain the same for the duration of the project. The operating costs of the project is estimated to be $200,000 per year. If the project is undertaken, the total investment in net working capital will increase by $70,000 initially, but the company will recover its investment in the net working capital at the end of 5th year. The tax rate is 30%, and the CCA rate for depreciation purposes is 30%. The equipment can be sold at the end of the project for $140,000. The discount rate appropriate for the project is 10%. Use a NPV analysis to decide if the company should undertake this project.
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