Calculate the sunk cost of the project

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Reference no: EM133674243

Question

Madetaylor Inc. manufactures financial calculators. The company is deciding whether to introduce a new calculator. This calculator will sell for $130. The company feels that sales will be 18,000, 22,000, 24,000, 22,000, and 18,000 units annually for the next five years. Variable costs will be 21% of sales, and fixed costs are $500,000 annually. The firm hired a marketing team to analyze the product's viability, and the marketing analysis cost $1,250,000. The company plans to manufacture and store the calculators in a vacant warehouse. Based on a recent appraisal, the warehouse and the property currently are worth $2.5 million after tax. If the company does not sell the property today, it will sell it five years from today at the current appraised value. This project will require an injection of net working capital at the onset of the project, $250,000. The firm recovers the net working capital at the end of the project. The firm must purchase equipment for $5,000,000 to produce the new calculators. The equipment has a 5-year life and is depreciated using the straight-line method. At the end of the project, the anticipated salvage value is 0. Surprisingly the firm can sell the machine at the end of the project for $600,000. The firm requires a 10% return on its investment and has a tax rate of 21%.

Calculate the sunk cost of the project.

Reference no: EM133674243

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