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QUESTION

You are considering a capital budgeting proposal to make glow-in-the-dark pacifiers for anxious first time parents.

You are considering a capital budgeting proposal to make glow-in-the-dark pacifiers for anxious first time parents. You estimate that the equipment to make the pacifiers would cost you $100,000 (which you can depreciate as a 3-year property (MACRS) for tax purposes) and that you can sell 30,000 units a year at $1.50 a unit. The cost of making each pacifier would be $0.60, and the tax rate you would face would be 40%. You also estimate that you will need to invest 30% of first year revenues in working capital at the start of the project and that you can salvage 80% of this working capital at the termination of the project in year 5.

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