Reference no: EM133559959
ABC corporation projects their future unit sales for a new headphone. The projected unit sales are as below.
| |
1 |
2 |
3 |
4 |
5 |
| Unit sales |
70000 |
80000 |
120000 |
100000 |
90000 |
To produce the headphones, the initial net working capital of $2,000,000 is required and additional net working capital is also required each year, which is 20% of the projected sales increase for the following year. The net working capital will be recovered at the end of a project. In addition, the initial installation cost of the machine for production is $20,000,000. The machine will be depreciated for tax purposes using straight-line depreciation with the useful life of 8 years. Also, costs and unit price are as below.
| Fixed cost |
$3,250,000 per year |
| Variable cost |
$280 per unit |
| Price |
$425 per unit |
In five years, the machine can be sold for about 20% of its acquisition cost. The tax rate is 30% and the required rate of return is 18%.
Required
- What is the NPV of the project? Explain and defend your processes, answer, and calculations clearly.
Assuming that the project can be repeated indefinitely, what is the NPV∞ of the project? Suppose that there is another project with the NPV of $4 million and the NPV∞ of $6 million. Which project would you choose, assuming that two projects are mutually exclusive and can be repeated indefinitely? Why? Explain and defend your processes, answer, and calculations clearly.