Reference no: EM132863747

Question - Klaatu Co. has recently completed a $500,000, two-year marketing study. Based on the results, Klaatu has estimated that 12,000 of its new RUR-class robots could be sold annually over the next eight years at a price of $10,130 each. Variable costs per robot are $8,200; fixed costs total $12 million per year.

Start-up costs include $39 million to build production facilities, $2.5 million in land, and $10 million in net working capital. The $39 million facility is made up of a building valued at $9 million that will belong to CCA class 1 and $30 million of manufacturing equipment (belonging to CCA class 8). At the end of the project's life, the facilities (excluding the land) will be sold for an estimated $10.3 million, assuming the building's value will be $4 million. When this project is over, there will still be other assets and UCC is always positive in each CCA class. The value of the land is not expected to change.

Finally, start-up would also entail fully deductible expenses of $1.4 million at year 0. An ongoing, profitable business, Klaatu pays taxes at a 40 percent rate. Klaatu uses an 18 percent discount rate on projects such as this one.

Should Klaatu produce the RUR-class robots?