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Question - Winthrop Company has an opportunity to manufacture and sell a new product for a five-year period. To pursue this opportunity, the company would need to purchase a piece of equipment for $130,000. The equipment would have a useful life of five years and a $10,000 salvage value. The CCA rate for the equipment is 30%. After careful study, Winthrop estimated the following annual costs and revenues for the new product:
Sales revenues $250,000
Variable expenses $130,000
Fixed expenses $70,000
The company's tax rate is 30% and its after-tax cost of capital is 10%.
Required -
1. Compute the net present value of the project.
2. Would you recommend that the project be undertaken?
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