Sunning Robotic Ltd has developed an automatic vacuum cleaning robot for households. The company expected that 50,000 units will be sold each year. The selling price per unit is $115. The variable cost per unit is $85, and total fixed costs are $55,000 per year. The equipment necessary to begin production will cost a total of $3,600,000. This equipment will be depreciated in a straight line manner with no savage value at year 3 when the product is phased out. The relevant tax rate is 30 per cent and the required return is 20 per cent. Based on these preliminary estimates:

a. Prepare the pro forma income statement of the new product. 

b. What is the operating cash flow each year?

c. Compute the NPV of the new product. Should the company accept or reject the new product? 

Answer rating: 100% (QA)

SOLUTION a Pro forma income statement Year 1 Sales 50000 units x 115unit 5750000 Variable costs 5000... View the full answer