Your employer, Mistry Electronics Organization Worldwide (MEOW), wants you to evaluate a potential capital expenditure project to produce a new Video Streaming device called the VideoTec.

MEOW has just received a consultants report on a market research study the company requested be done to evaluate the feasibility of this new product. The report was delivered to MEOW last week along with an invoice from the consultant for $20,000 which is to be paid within the next 30 days.

Based on the market research report, it is estimated that the VideoTec will sell for $175 per unit and MEOW will sell 2,000 units in year one, 2,500 in year two, and 3,000 in year three. Variable costs are estimated at $70 per unit and fixed costs at $117,000 per year. The market for this new product is thought to be short lived and therefore the project is expected to have only a three year life.

The initial investment in new manufacturing machinery is estimated at $225,000. The machine is a class 8 asset for tax purposes and has a CCA rate of 30%. Its estimated that MEOW will be able to sell the machine in 3 years time for $70,000 on the used equipment market.

The project will require an initial total additional net working capital of $75,000 for required raw & packaging material inventories and Accounts Receivable from expected extra credit sales net of an anticipated increase in Accounts Payable.

In some previous financial analysis work you had done for the company you had estimated the weighted average cost of capital at 10%.

MEOWs tax rate is 40%.

Required:

What do you recommend to the management of MEOW regarding this investment opportunity? Be sure to briefly & clearly explain your business or investment reasons for this recommendation including the various financial return measures we developed in class & how they relate to the governing objective of corporate finance.