Cost of new plant and equipment: $ 7,900,000

$9.00

Description

We are considering the introduction of a new product.

Currently we are in the 34% tax bracket with a 15% discount

rate. This project is expected to last five years and then,

because this is somewhat of a fad project, it will be

terminated. The following information describes the new

project:

Cost of new plant and equipment: $ 7,900,000

Shipping and installation costs: $ 100,000

Unit sales:

Sales price per unit: $300/unit in years 1–4 and

$260/unit in year 5.

Variable cost per unit: $180/unit

Annual fixed costs: $200,000 per year

Working capital requirements: There will be an initial

working capital requirement of $100,000 just to get

production started. For each year, the total investment in
net

working capital will be equal to 10% of the dollar value of

sales for that year. Thus, the investment in working capital
will

increase during years 1 through 3, then decrease in year 4.

Finally, all working capital is liquidated at the termination
of the

project at the end of year 5.

Depreciation method: Straight-line over 5 years

assuming the plant and equipment have no salvage value

after 5 years.

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