Question
You are considering adding a new item to your companys line of products. The machine required to manufacture the item costs $600,000 and it falls
You are considering adding a new item to your companys line of products. The machine required to manufacture the item costs $600,000 and it falls into the three-year MACRS classification. The MACRS three-year depreciation rates are 33%, 45%, 15%, and 7%. The new item would result in a $100,000 increase in accounts receivable, a $75,000 increase in inventory and a $90,000 increase in accounts payable. You plan to market the items for four years and then sell the machine for $100,000. You expect to sell 100,000 items per year at a price of $10 per item You expect manufacturing costs to be $6 per item and fixed costs to be $100,000 per year. If the tax rate is 35% and your companys weighted average cost of capital is 11% per year: 1. What is the net present value (NPV) of selling the new item? 2. What should you do? "YES" for invest or "NO" for not invest
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