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.