Zap Corporation has been manufacturing batteries for years. The company has recently spent $800,000 to develop a new battery that is smaller, lighter, charge faster and has a higher density than similar batteries on the market. Given the company success in manufacturing batteries, the company is considering manufacturing electric scooter to complement the company's current operation. If the company proceed with the project, the new battery will be fitted onto the electric scooter. Prior to this, the company has employed a consultant to conduct a market study on the demand of electric scooter to help the company to make the capital budgeting decision. The company spent $200,000 on the market report. The electric scooter project will have an expected life of five years and will generate sales of 4,800 units annually at a selling price of $2,800 each. The fixed costs are $2,500,000 per year and the variable costs per unit are $1,400. The project requires an initial investment of $9,300,000 in manufacturing equipment. This $9,300,000 will be 100 percent depreciated on a straight-line basis over the five-year life of the project. 

The manufacturing equipment can be sold for $1,500,000 (before tax) at the end of the project. The project will also require the company to make an investment in net working capital of $500,000.

The company tax rate is 34 percent and the project's required return is 23 percent. Should the company invest in this project?

Answer rating: 100% (QA)

Calculation of NPV of the Project Particulars 0 1 2 3 4 5 Initial Investment Cost of Equipment A 930... View the full answer