Reference no: EM132965376

Problem 1: ZooLogic, a zoo management company, has asked your team to evaluate a proposed capital budgeting project. Your team has been charged with analyzing the Creature Gage, an artificial intelligence product which continuously collects biological data from zoo animals and sends assessments and alerts to the zoo caretakers and veterinarians. The target market for this product is large metropolitan zoos. Market research data suggests that the firm can sell 25 systems per year, at a price of $__$5,200,000_____ each. Variable costs are expected to be __$3,000,000___ per unit. Fixed costs for the project will run at $___$500,000________ per year. The project is expected to have a 4 year life.

The firm will need to invest in $100,000,000 of equipment at the start of the project. It will cost $2,000,000 to install the equipment. MACRS 5-year class life depreciation is to be used. In four years, the equipment is expected to have a market value of $5,000,000. Net working capital is expected to increase by $4,000,000 at the start of the project and stay at this level until the end, when it will be recovered. The cost of capital for Zoologic is 16% and the tax rate is 22%.