Plans to buy machine to make new product

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Reference no: EM131892098

T Co plans to buy a machine to make new product. The machine will cost $250,000 and last for four years, at the end of which time it will be sold for $5,000. T Co expects demand for the product to be:

Year Demand (units)

1 35,000

2 40,000

3 50,000

4 25,000

The selling price is expected to be $12.00/unit and the variable cost of production is expected to be $7.80/unit. Incremental annual fixed production overheads = $25,000 per year. Selling price and costs are all in current price terms. Selling price and costs are expected to increase as follows

Selling price : 3% per year; variable cost: 4% per year

Fixed production overheads: 6% per year

Requirement: Calculate the ROCE (T Co's target ROCE = 20%) and state based on this, whether the investment should proceed.

Reference no: EM131892098

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