You are the financial analyst for furniture manufacturer. The company is considering using a certain new raw material in its furniture. The company has estimated the information in the following table about the market for a chair with the new material. The company expects to sell the chair for six years. The equipment required for the project has no salvage value. The required return for projects of this type is 13 percent, and the company has a 40 percent tax rate. Pessimistic Expected Optimistic Market size 130,000 150,000 165,000 Market share 21% 25% 28% Selling price $140 $145 $150 Variable costs per unit $102 $98 $94 Fixed costs per year $1,015,000 $950,000 $900,000 Initial investment $2,200,000 $2,100,000 $2,000,000 Required: Should you recommend the project?
You are the financial analyst for furniture manufacturer. The company is considering using a certain new raw material in its furniture. The company has estimated the information in the following table about the market for a chair with the new material. The company expects to sell the chair for six years. The equipment required for the project has no salvage value. The required return for projects of this type is 13 percent, and the company has a 40 percent tax rate.
|
Pessimistic |
Expected |
Optimistic |
|
|
Market size |
130,000 |
150,000 |
165,000 |
|
Market share |
21% |
25% |
28% |
|
Selling price |
$140 |
$145 |
$150 |
|
Variable costs per unit |
$102 |
$98 |
$94 |
|
Fixed costs per year |
$1,015,000 |
$950,000 |
$900,000 |
|
Initial investment |
$2,200,000 |
$2,100,000 |
$2,000,000 |
Required:
Should you recommend the project?
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