7. Project X is a new type of audiophile-grade stereo amplifier. Fixed costs for
project run $610,000 per year. Variable costs per amplifier run about $5,000 per
unit, and the product should have a four-year life.
We can sell 500 units per
year at a price of $10,000 each. We require a 20% return on new products such
as this one. Further, we need to invest $1,100,000 in manufacturing equipment
with a CCA class rate of 20%. In four years, the equipment can be sold for its
We would also have to invest $900,000 in working capital at the
start. After that, net working capital requirements would be 30% of sales. The
tax rate is 40%. Calculate the net present value of the project?
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