Unicycle & Co. currently sells unicycles for $600 per unit where the variable cost of production is
Question:
Unicycle & Co. currently sells unicycles for $600 per unit where the variable cost of production is $200 per unit. The company is now considering launching a new product line to produce electric unicycles. The fixed assets required for this project will cost $1 million and can be depreciated straight-line to zero in 5 years. The expected life of this project is 3 years, after which the Company expects to be able to sell the fixed assets to its competitor for $250,000. The electric unicycles will sell for $1,200 per unit and has a variable cost of $400 per unit. The fixed cost is $50,000 every year. The company has spent $50,000 on a marketing research, which shows that this new product will have 1,000 unit sales every year in all 3 years. However, every electric unicycle the company sells reduces the sale of its old unicycle product by 0.5 unit. The new product line also requires a net working capital of 50% of the expected sales, which should be in place before the production. The tax rate is 30%, and the cost of capital is 10%.
Based on the DCF valuation framework, calculate the value creation of this new project. Show detailed calculations or descriptions of the calculations
Cost Management Measuring Monitoring And Motivating Performance
ISBN: 9781118168875
2nd Canadian Edition
Authors: Leslie G. Eldenburg, Susan Wolcott, Liang Hsuan Chen, Gail Cook