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Operating Costs, Investments, Depreciable Setup Costs

Molecugen has developed a new kind of cardiac diagnostic unit. Owing to the highly competitive nature of the market, the sales department forecasts demand of 5,000 units in the first year and a decrease in demand 10% a year after that. After 5 years, the project will be discontinued with no salvage value. The marketing department forecasts a sales price of $15 a unit. Production estimates operating costs of $5 a unit, and the finance department estimates general and administrative expenses of 15,000 a year. The initial investment in land is 10,000 and other no depreciable setup costs are 10,000.

A) Is the new project acceptable at a cost of capital of 10% (use straight line depreciation over the life of the project and a tax rate of 35%)?
B) If the marketing department had forecast a decline of 15% a year in demand, would the project be acceptable?
C) If the market department had forecast a decline in sales price of 10% a year, along with the 15% annual decline in demand predicted in b would the project be acceptable?
D) If the prices decline by 10% a year, the marketing department estimates that demand will be a constant 5,000 units a year. Is the project acceptable?

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1. Molecugen has developed a new kind of cardiac diagnostic unit .Owing to the highly competitive nature of the market, the sales department forecasts demand of 5,000 units in the first year and a decrease in demand 10% a year after that .After 5 years, the project will be discontinued with no salvage value. The marketing department forecasts a sales price of $15 a unit. Production estimates operating costs of $5 a unit, and the finance department estimates general and administrative expenses of 15,000 a year .The initial investment in land is 10,000 and other no depreciable setup costs are 10,000.

A). Is the new project acceptable at a cost of capital of 10% (use straight line depreciation over the life of the project and a tax rate of 35%.
MOLUCEGEN
YEAR 0 1 2 3 4 5
Demand 5,000 4,500 4,050 3,645 3,281

Sales revenue $75,000 $67,500 $60,750 $54,675 $49,208
Operating costs ($25,000) ($22,500) ($20,250) ($18,225) ($16,403)
General and administrative ...

Solution Summary

The expert examines operating costs, investments and depreciate setup costs.

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