Byrex has developed a new kind of bypass unit. The sales department forecasts demand of 5,000 units in the first year and a decrease in demand of 10 percent a year after that. After five years, the project will be discontinued with no salvage value. The marketing department forecasts a sales price of $15 a unit. Production estimates operating cost of $5 a unit, and the finance department estimates general and administrative expenses of $15,000 a year. The initial investment in land is $10,000, and other nondepreciable setup costs are $10,000.

(Note: Use straightline depreciation over the life of the project and a tax rate of

35 percent.) Show workings and excel spreadsheet.

Required:

1. Is the new project acceptable at a cost of capital of 10 percent?
2. If the marketing department had forecasted a decline of 15 percent a year in demand, would the project be acceptable?

If the marketing department had forecast a decline in sales price of 10 percent a year, along with the 15 percent annual decline in demand predicted in (b), would the project be acceptable?

Answer rating: 100% (QA)

Answer Byrex Bypass Unit Project Analysis Heres a breakdown of the analysis with formulas and an example spreadsheet 1 Data Demand Year 1 5000 units A... View the full answer