Clyne Industries is considering whether it should produce its newly invented Slammin Jammin Basketball Goal Set. To bring this product to the market will require the purchase of equipment costing $600,000. Shipping and installation expenses associated with the equipment are estimated to be $50,000. In addition, net working capital investments of $50,000 will be required to get production started. No additional investments in net working capital will be required in subsequent years. Revenues are expected to be $250,000 in the first year and grow at a rate of $25,000 per year until the project is terminated at the end of the fourth year. Annual operating expenses (excluding depreciation) are expected to be $80,000 in the first year and to grow at a rate of $10,000 per year until the end of the project's life. Depreciation will be under MACRS for a 3-year class asset, with depreciation rates of 33 percent, 45 percent, 15 percent, and 7 percent. The salvage value of the equipment at the end of four years is expected to be $50,000. Clyne Industries pays taxes at the 40 percent rate, and its cost of capital is 15 percent.
Based on its Net Present Value (NPV), should the Goal Set be produced?
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The solution finds out NPV for Clyne Industries.