Reference no: EM133093457

Question - A company is deciding whether to manufacture a new product or not. The new product is estimated to be in demand for 15 years only. The company expects that 50,000 units of the new product can be sold in each of the 15 years. The selling price is expected to be $30 per unit, while variable and fixed costs are estimated to be 50% of the selling price and $400,000 per year, respectively.

To start manufacturing the new product, the company needs to purchase a special machine costing $1,000,000 initially. The capital cost allowance rate for the machine is 20%, while the company uses the straight-line method to depreciate the machine for accounting purposes. At the end of the 15th year, the estimated residual value of the machine is $120,000.

In addition, the company will need to contribute $110,000 of net working capital initially, as well as an additional $200,000 of net working capital at the end of the third year.

The applicable corporate tax rate is 30%, while the required rate of return is 12% per year. Should the company manufacture the new product or not? Show your calculation.