Reference no: EM132584815

a. Huffman Systems has forecasted the following sales for home alarm systems to be 63,000 units per year at $38.50 per unit. The cost to produce each unit is expected to be about 42% of the sales price. The new product will have an additional $494,000 fixed costs each year, and the manufacturing equipment will have an initial cost of $2,400,000 and will be depreciated over eight years (straight-line). The company tax rate is 40%. What is the annual operating cash flow for the alarm systems if the projected sales and price per unit are constant over the next eight years?

b. Determine whether Huffman Systems should add the home alarm system to their set of products. The manufacturing equipment will be sold off at the end of eight years for $210,000 and the cost of capital for this project is 14%.

c. What is an erosion cost? Should this type of costs be considered as cash outflows for a project that a firm has committed to? Give an example of an erosion cost.

d. Why do you think investing in working capital at the beginning of a project is needed? Do you think this investment can be recovered at the project's final operating year?

e. Revolution Records will build a new recording studio on a vacant lot next to the operations center. The land was purchased five years ago for $450,000. Today the value of the land has appreciated to $780,000.

Revolutionary Records did not consider the value of the land (it had already spent the money to acquire the land long before this project was considered). The NPV of the recording studio was $600,000. Should Revolution Records consider the land as part of the cash flow of the recording studio? If yes, what value should be used, $450,000 or $780,000? How will the value affect the project?