Use straight-line depreciation over ten-year life of project

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Reference no: EM131354432

Hit or Miss Sports is introducing a new product this year. If its see-at-night soccer balls are a hit, the firm expects to be able to sell 66,000 units a year at a price of $70 each. If the new product is a bust, only 46,000 units can be sold at a price of $65. The variable cost of each ball is $40, and fixed costs are zero. The cost of the manufacturing equipment is $8.5 million, and the project life is estimated at 10 years. The firm will use straight-line depreciation over the 10-year life of the project. The firm’s tax rate is 40%, and the discount rate is 10%.

Hit or Miss Sports can expand production if the project is successful. By paying its workers overtime, it can increase production by 41,000 units; the variable cost of each ball will be higher, however, equal to $45 per unit. By how much does this option to expand production increase the NPV of the project? (Assume the probability the see-at-night soccer balls will be a hit is 50%). (Do not round intermediate calculations. Round your answer to the nearest dollar amount.)

Reference no: EM131354432

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