Investment attractive to the company

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Muscle Motors has a new sports car called the SmoMobile® that it is evaluating before bringing to market. The new car, which is customized for the buyer, would be sold for the next five years at a price of $95,000 each. The equipment necessary for production will cost $165 million and be depreciated on a 5-year MACRS schedule. The company projects that fixed costs will be $53.9 million per year and variable costs will be $49,600 per car. The company will require an investment in inventory equal to 10 percent of sales a year prior to the sale. The inventory will be returned at the end of the project’s life. The equipment can be sold for $20 million at the end of the project, although the company will retain the equipment for a future model. The required return is 12 percent and the tax rate is 38 percent. How many cars must be sold each year to make this investment attractive to the company?

Reference no: EM132001509

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