Question
Your firm is considering the introduction of a new product. The marketing department has estimated that 100,000 units will be sold next year for $50
Your firm is considering the introduction of a new product. The marketing department has estimated that 100,000 units will be sold next year for $50 per unit. Unit sales are expected to increase at 6 percent for each of the four subsequent years and the price is expected to increase at the rate of inflation, 3 percent. Costs are estimated to be 25 percent of sales. Production equipment of $9 million is needed. For simplicity, assume no changes in net operating working capital and no depreciation or salvage value. The firms marginal tax rate is 40 percent. If the firms nominal required rate of return for a project of this risk is 13.3 percent, should your firm move forward with the product?
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