Question
To manufacture a new line of cleaning supplies, a company must immediately invest $775,000 in new equipment. At the end of Years two and six,
To manufacture a new line of cleaning supplies, a company must immediately invest $775,000 in new equipment. At the end of Years two and six, there will have to be a major overhaul of the equipment at a cost of $150,000 on each occasion. The new product is expected to increase annual operating profits by $150,000 in each of the first four years, and by $125,000 in each of the subsequent three years. The equipment will then be salvaged at the end of year seven to recover about $200,000. Should the product be manufactured if the company's cost of capital is 13% compounded annually?
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