Reference no: EM133106937

Question - ABC is considering introducing a new hardware product. The new production line for the product requires an Initial investment of $2 billion today. The investment will be depreciated to 0, straight line, over 10 years. However, after 10 years, ABC is expected to sell the production line for $500 million (before tax). Sales projections for the following 10 years appear below. Production costs are assumed 50% of the sales. The production will take place in a vacant building that ABC already owns and is rented for $10 million per year (after-tax cash flow -rents are not expected to change in the next ten years). ABC needs working capital for the project. The working capital requirements are 10% of next year's sales. The introduction of the product is expected to reduce the sales and earnings of more inferior products that ABC produces. The expected reduction is $50 million a year in net cash flow. You can assume a tax rate of 35% and ABC cost of capital of 12%. Should ABC go ahead with the introduction of the new product? Use excel to show work.