The lawn mower company A is considering a proposal to start a project that is equally as risky as the overall firm. They invested $50,000 for Research & Development Program 10 years ago. They expect the revenues of new mower line are $100,000 from year 1 to year 3. However, since the targeted customers for new mower lines overlaps with the customers of old mower, they expect the sales of the old mower to decrease by $10,000 a year, since the customers switch to the new mower lines.

The factory originally cost $45,000 and is being 100% depreciated for tax purposes over 3 years using straight-line depreciation. The variable production costs in year 1 are $20,000. The variable production costs are expected to grow at 2% from year 1 to year 3. The fixed costs of maintaining the lawn mower factory are $15,000 per year from year 1 to year 3.

Furthermore, the cost of removing the equipment will roughly equal its actual value in three years, so it will be essentially worthless on a market value basis as well. Finally, the project will require an initial $20,000 investment in net working capital and no extra net working capital required for the next 3 years. At the end of the project's life, the firm will recover $20,000 that was tie up in working capital. Assume tax rate is 35% and required rate of return of the new project is 9%. As CFO, will you accept this project?

Answer rating: 100% (QA)

To determine whether the lawn mower project is acceptable we need to calculate the projects net pres... View the full answer