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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?

Solution Summary

The solution goes into a great amount of detail in order to answer the question regarding WACC. 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.