You are evaluating a project for Ultimate Inc. The project produces chew-resistant doghouses. You… 1 answer below »

You are evaluating a project for Ultimate Inc. The project produces chew-resistant doghouses. You estimate the sales price of these doghouses to be $500 and sales volume to be 2,500 units per year over the project’s three-year life. Variable costs amount to $300 per unit and fixed costs (not including depreciation) are $150,000 per year. The project requires an initial investment of $250,000 and this will be depreciated on a straight-line basis to zero over the three-year project life. There will be an initial net working capital investment of $90,000 (t0) and two further investments of $90,000 at the beginning of each year thereafter. The full amount of working capital will be recovered at the end of the project’s life (i.e., $270,000 at t3). The tax rate is 35% and the required return on the project is 15%.

 

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