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Chapter 12 Non-Textbook Problem 4 Benson Company currently produces and sells a line of children's toys. Management is considering entering the...
Chapter 12 Non-Textbook Problem 4 Benson Company currently produces and sells a line of children's toys. Management is considering entering the market for a new line of remote controlled toy cars. Producing the new line would require an initial investment of $5,000,000 for the purchase of additional machinery. Marketing estimates that the company could sell 50,000 units per year. However, the market is very competitive and it is somewhat unclear what the selling price would be. Marketing further estimates that there is a 40% chance the units would sell for $100 each and there is a 60% chance the units would only sell for $60 each. Production managers have submitted a budget for variable costs of $35 per unit for the new product. Given the competitive nature of the market for this line of product, managers expect that they would be able to abandon the product line and sell the machinery for $4,200,000 after one year if the company is only able to sell the product for $60 per unit. The product line and the new machinery would have an expected useful life of 5 years. The machinery would be depreciated on a straight-line basis with no salvage value. The company is in the 40% tax bracket. Required 1. What is the net present value of the proposed project including the option to abandon? Use a 12% required rate of return.
