Reference no: EM133129590

Question - ABC Company produces a variety of cleaning products. The company's R&D department has recently come up with a new glass cleaner that is superior to all of the products in the market, including the one that ABC company currently produces. The new cleaner would be priced at $6 per case and would have a variable cost of $2 per case.

ABC Company would have to buy additional machinery costing $8000,000 to make the new cleaner. The machinery would have a ten-year life. Expected volume of the new cleaner is 800,000 cases per year for ten years. The machinery would be depreciated using the straight-line method with $100,000 as the salvage value at the end of ten years. In addition to the variable cost, there would be increased fixed cost of $200,000 per year requiring cash disbursements.

One problem with making the investment is that sales of the company's existing cleaner would be affected. The volume of sales of the existing cleaner would likely to be decreased by 300,000 cases per year. A case of the existing cleaner sells for $5 and has a variable cost of $3.

The company's cost of capital is 14% pa.

Should the company go ahead with the production of the new cleaner?