You are considering the introduction of a new fadproduct, gidgets, which will on

Question

You are considering the introduction of a new fadproduct, gidgets, which will only be on the marketfor 5 years. Last year, you spent $20,000 on amarket study to determine the appropriate pricewould be $5 per gidget. You expect sales to be10,000 units in year 1 and grow by 2,000 units eachyear after. Costs are expected to be 20% of sales,and the firm’s marginal tax rate is 40%. In addition,you must purchase a gidget manufacturingmachine for $100,000, which is depreciated usingMACRS (3-year class), and worthless at the end ofthe project. Due to an increase in inventories, networking capital is expected to increase by $15,000. If the required return on this project is 12%, shouldyou introduce the new product?

May someone post a detailed answer to this please?

Explanation / Answer

Depreciation will be only for equipment accordin to follwing schedule

Sunk cost wont be depreciated

NPV has been calculated as follows =-135000 + 37332/(1.12) + 46580/(1.12)^2 + 39524/(1.12)^3 ...+58200/(1.12)^^5

= 20445.04

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