You as a Toruss controller have to determine if the project is feasible based on the following estimations provided by the management; the life of the project is 10 years: The new division will generate revenue from two streams: internal orders for amplifiers and external clients. Toruss management estimates that internal sales will be 8,500 units in the first year and it will increase between 5% and 15% per year the following years. After internal analysis and discussions, the transfer price of the new device was set up to equal the variable cost plus 16%. An analyst hired by Torus estimates that the new division will be able to sell 6000 units in the first year to external clients and it expects a subsequent increase between 3% to 12% year over year. This estimation is based on a selling price of $ 320 The standard usage of materials for the new device is 1.9 meters of copper cable, one chip of $50, and other raw materials totaling $22. It customary for Torus, to purchase copper cables only in large rolls of 325 meters at a price of $1,144 per roll. Assembly workers are paid at an hourly rate of $45 and testers at a rate of $60 per hour. The company policy is to increase salaries with the inflation rate plus 1%. It is estimated that the inflation rate will be constant in the foreseeable future at 2 per year. 3 The standard labour required for the device is 3.5 hours for assembly and 1.5 for testing. The overhead costs will be $300,000 in the first year and expected to increase at a rate of 1% per year. Working Capital needed is $400,000, which will be recovered fully at the end of the project To promote the new device to external clients, Torus will spend an estimated $200,000 per year. Every 2 years an additional $40,000 is required for software development and deployment. The first software upgrade is expected to take place in year 3. Depreciation Total investment in the project is estimated at $3,500,000 from which 20 % will be invested in software development (no salvage value) Class 10, CCA rate 30%, and the remaining amount will be used to acquire a new assembly line (Class 8, CCA rate 20%), the assembly line has a salvage value estimated at 15% of the original price. WACC Torus has another $3,000,000 bank loan with an effective interest rate of 7%; $6,000,000, 8%, 17-year bonds selling at 85% of face value; $4,500,000 of 8%, $10 noncumulative, non-callable preferred stock with a total market value of $2,440,000; 100,000 shares of $10 par common stock, with a total current market value of $6,500,000. The estimated required rate of return on the common stock, based on application of the CAPM, is 15%. Other The firm is subject to a 40% income tax rate, and it uses 10% discount rate.

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