Reference no: EM132932092
Question - 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 III 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 III.
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 - Advise the CEO as to whether the project should be undertaken. Show calculations.