Reference no: EM131245199
The Baldwin Company is considering investing in a machine that produces bowling balls. The cost of the machine is $100,000. Production by year during the five-year life of the machine is expected to be as follows: 5,000 units, 8,000 units, 12,000 units, 10,000 units, and 6,000 units.
The interest in bowling is declining, and hence management believes that the price of bowling balls will increase at only 2% per year, compared with the general rate of inflation of 5%. The price of bowling balls in the first year will be $20.
On the other hand, plastic used to produce bowling balls is rapidly becoming more expensive. Because of this, production cash outflows are expected to grow at 10% per year.
First-year production cost will be $10 per unit. Depreciation of the machine will be straight-line for five years, after which time the salvage value will be zero. The company's tax rate is 40% and its cost of capital is 15%, based on the existing rate of inflation. Should the project be undertaken?
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