Question

Mann Co is a listed company. In past several months, the stock price of the Mann Co has continued to decline due to operating losses, which makes the board of directors in face of great pressure. Mann Co' board is considering to invest in a new project to improve company's financial performance. According to the prediction of the Mann Co's financial manager, the new project life is expected to be 5 years. At the beginning of the project, the sales volumes and selling price of the products are relatively high. In the later stage of the project, with the entry of competitors, both the sales volume and unit price will decrease. The forecast sales volumes, selling price, variable costs of the projects are as follows: 1 2 3 4 5 110000 120000 120000 100000 80000 Year Sales (units/year) Selling price ($/unit) Variable cost ($/unit) 300 300 300 270 250 180 180 180 180 180 The equipment needed to begin production has an installed cost of $30 m and the tax law allows Mann Co equipment depreciate to zero over 10 year using straight-line depreciation. Mann Co's financial manager forecast that this equipment can be sold for S2 m after completion of the project. In addition, production of the project will require $1.5m in net working capital to start and additional new working capital investments each year equalows to 10% of the projected sales increase for the following years. The financial manager estimates that the annual