Cost of removing the equipment will approximate market value

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Reference no: EM131825074

1) Your firm is looking into offering a new product. This new project will run for only five years. To produce this new product, you will need new equipment, which will cost $2,134,355 base cost, with shipping and installation costing another $33,554. Your research has led you to believe that you can sell 75,000 units per year for $22.96 per bag. The cost of the contents, packaging and shipping are expected to be $8.43 per bag. The annual fixed costs of the venture are expected to be $360,000. For simplicity, we will assume that the cost of the project will be 100 percent depreciated over the five-year life of the project. Furthermore, the cost of removing the equipment will approximate the market value at the end of the project, so it will essentially be worthless on the books and in actuality. We will assume a tax rate of 34%. It is believed that as a result of this project that inventory will have to increase by $71,750, accounts receivable will increase by $35,875, and accounts payable will increase by $35,125. Using the cost of capital in your firm, should you invest in the new project? Why?

Reference no: EM131825074

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