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You are considering a new product launch. The project will cost $1,950,000, have a four-year life,...

You are considering a new product launch. The project will cost $1,950,000, have a four-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 180 units per year; price per unit will be $24,000, variable cost per unit will be $15,000, and fixed costs will be $540,000 per year. The required return on the project is 10 percent, and the relevant tax rate is 34 percent.

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Answer #1

Annual Depreciation = (Cost - salvage value)/useful life

Annual Depreciation = (1950000-0)/4

Annual Depreciation = $ 487500

Annual Cash Flow = ((price - variable cost per unit)*Sale quantity - fixed cost)*(1-tax rate) + Annual Depreciation *tax rate

Annual Cash Flow = ((24000-15000)*180 - 540000)*(1-34%) + 487500*34%

Annual Cash Flow = 878550

NPV = - Initial investment + Annual Cash Flow *(1-(1+r)^-n)/r

NPV = - 1950000 + 878550*(1-(1+10%)^-4)/10%

NPV = $ 834,885.29

Decision : Project is viable since NPV is positive, You should consider for new product launch.

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