Reference no: EM132902999

Top Dogs Inc. ("Dogs") has a corporate tax rate of 25%. Dogs is planning to undertake the manufacture of a very "cool" dog collar. Each collar will sell for $45.00 per unit.

Dogs was incorporated in Year 2010. The CEO was hired in Year 2015. The annual Fixed Costs of this project are projected as follows:

Property Tax:     $10,000.00

Fixed Overhead:   $3,000.00

Administration Salaries: $25,000.00

The collars have an estimated variable cost of $7.50/unit sold.

The projected unit sales of the collars over the next 5 years are as follows:

Year I       5,000

Year II      7,500

Year Ill     10,500

Year IV     20,000

Year V       35,000

Total          78,000

• In order to undertake this product line, Dogs will be required to invest $400,000.00 in new manufacturing equipment at the outset of the project. A further capital investment of $200.000.00 will be required at the start of Year Ill.
• Dogs depreciates all of its equipment, for accounting purposes, on a straight-line basis at a rate of 20% per year.
• The salvage value of the equipment is expected to be 5% of the revenue for Year V. The project will not require any investment in Net Working Capital.
• Dogs utilizes a Required Rate of Return of 12% for all investments. This project will be terminated at the end of Year V.
• The CEO is unsure about this project. He wants your input before he makes any decision. The CEO advises that he is not interested in reading anything about IRR.

Required:

Problem 1: Advise the CEO as to whether the project should be undertaken. Show calculations.