Reference no: EM131528602

A projection for a new product line was prepared by a task force from Engineering and Sales. The plan presented to management calls for an initial investment of $15,000,000 which is projected to generate annual revenue which increases at 10% per year, with a first year revenue of $5,000,000. Annual costs which are estimated at $2,075,000 for the first year are expected to benefit from increased production efficiency and lower raw material costs to the extent of a 5% annual cost reduction. The task force has made a case for a 10 year study period, which management has accepted. Calculate the annual rate of return for this projection. The company uses an MARR of 15%. A.) Is the project attractive? During the task force's presentation to management, serious doubt is expressed about the cost estimates, the opinion is that they are too low. Assuming that management accepts the sales projections and the same annual cost reduction of 5%, how large could the first annual cost be to still meet the 15% MARR?