Reference no: EM132530963

You have been hired as a consultant for Medicals Inc., manufacturer of medical devices. The company projects unit sales for a new dental implant as follows:

Year Unit Sales
1 73,000
2 86,000
3 97,000
4 68,000

Additional information:

• Production of the implants will require €1,500,000 in net working capital immediately, all of which will be recovered at the end of the project.

• Total fixed costs are €4,200,000 per year, variable production costs are €255 per unit, and the units are priced at €375 each.

• The equipment needed to begin production has an installed cost of €8,500,000. This equipment qualifies as three-year MACRS property (depreciation rates are 33.33% for Year 1, 44.45% for Year 2, 14.81% for Year 3, and 7.41% for Year 4).

• In four years, this equipment can be sold for about 20 percent of its acquisition cost.

• The tax rate is 21 percent and the required return is 24 percent.

Instructions:

1. Complete the pro forma below and determine total cash flows for each year of project's life.

2. Would you recommend to accept or reject the project? Explain your decision.