X is examining the possibility of manufacturing and selling a cordless vacuum cleaner that is specifically designed for homes with pets. X estimates the unit selling price for the vacuum cleaners as TL2,500. Variable costs will equal TL1,500 per unit and fixed costs per year would approximate TL2,000,000. Up-front investments in plant and equipment will total TL27,000,000 which will be straight-line depreciated over three years down to a book value of zero. The initial working capital investment will be TL100,000,000 and will rise proportionally with sales and will be invested at the beginnings of the years. The project leader forecasts that sales of the vacuum cleaners will be 50,000 units the first year, 60,000 units the second year, and 45,000 units the third year, at which time product life cycles would require closing down production of the model. At the end of the three year horizon, the market value of the project’s assets is estimated to be about TL7,000,000. If the firm’s weighted average cost of capital is 18 percent for such projects and its tax rate is 40 percent, using both the NPV and IRR rules, decide whether Arçelik should go ahead with the project.

Answer rating: 100% (QA)

NPV 18 TL Vaccum Selling Price 2500 Variable Cost 1500 Fixed Cost 2000000 Investment 27000000 Useful ... View the full answer