Your firm has just developed a new handheld PDA, code-named the Model A.
To produce Model A, the firm would need to invest $20 million in new plant and equipment. The firm would sell Model A for a per unit profit of $200. Sales are expected to be 30,000 units in year 1, 40,000 in year 2, and 50,000 in year 3. Net working capital and taxes are zero, the WACC is 12%. Model B will replace Model A in year 4, with the same price and unit costs. Sales are forecasted to be 60,000 units in year 4, 80,000 in year 5, and 100,000 in year 6. Model B would require $30 million in new plant and equipment.
Should your firm proceed with the investment?
What if Model B requires an investment of $40 million?
The solution goes into a great amount of detail in order to answer the question. The solution is very well written and easy to understand. The explanation can be very easily understood by anyone with a basic understanding of the concepts. Overall, an excellent response to the question being asked.