Question
Wegetthem Inc is investigating a new product line.The projected unit sales of the new product line, a new household-use laser-guided cockroach search and destroy system,
Wegetthem Inc is investigating a new product line.The projected unit sales of the new product line, a new household-use laser-guided cockroach search and destroy system, is as follows:
The new product line will be priced to sell at $380 each.
The cockroach eradicator product line will require $1,800,000 in net working capital to start, and total net working capital will rise to 15 percent of in sales in the following years.The variable cost per unit is $265, and total fixed costs are $1,200,000 per year ($750,000 of the total fixed costs are incremental to the new project).The equipment necessary to begin production of the product line will cost a total of $24 million.An additional $1 million in required to prepare the factory for the product line - this investment in the factory is required even if the project is not accepted.Assume the investment qualifies for CCA at a rate of 20 percent.In five years, it is expected that this equipment will be worth about 20 percent of its cost and will be sold for that amount.The factory will require $500,000 to return it back to a usable work space for future investments.
Required: The relevant tax rate is 35 percent, and the required return is 18 percent.Based on these preliminary estimates, should the company invest in the new product line - why?
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