Economics Problem
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1. New Balance Inc. has spent $10 million developing a new line of Tennis shoes. Production engineers have determined that it will cost $6 million to retrofit the existing plants to produce the new line of tennis shoes. Marketing suggests that the present value of net profits from all future sales of tennis shoes will be $14 million. Based on this analysis, management has considered dropping the project since all costs will exceed net profits.
1. Do you agree with this recommendation? Explain.
2. The CFO indicates that if the tennis shoes are produced and marketed, $6 million of corporate overhead expenses will be assigned to the product. Does this change your answer to (1)? Explain.
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Solution Summary
This solution involves assessing an economic analysis of the present value of net profits for the future sales of a given organization.
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1. Disagree. The $10mil that is already spent is called a sunk cost. It will not come back regardless of the company's decision, so it should not be considered in the ...
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