Lisowski Laptops is examining the possibility of manufacturing and selling a not

Question

Lisowski Laptops is examining the possibility of manufacturing and selling a notebook computer that is compatible with both PCs and Macintosh systems and that can receive television signals. Its estimated selling price is $2,500. Variable costs (supplies and labor) will equal $1,500 per unit, and fixed costs per year would approximate $200,000. Up-front investments in plant and equipment will total $270,000, which will be straight-line depreciated over three years. The initial working capital investment will be $100,000 and will rise proportionately with sales. Bill, the CEO, forecasts sales of the laptop will be 50,000 units the first year, 60,000 units the second, and 45,000 units the third year, at which time product life cycles would require closing down production of the model. At that time, the market value of the project's assets will be about $70,000. LL's tax rate is 40 percent and its required return on projects such as this one is 17 percent. Should lisowksi laptops offer the new computer and why?

Explanation / Answer

Yes lisowksi laptops should offer new computers.

It is because of,

in the first year, it has profit, PAT=((1000*50000)-(200000+100000+81000))*0.6=29771400,

in the second year, it has profit,

PAT=((1000*60000)-(200000+120000+81000))*0.6= 35705400.

in the third year, it has profit,

PAT=((1000*45000)-(200000+90000+81000))*0.6= 26777400.

the asset value = 70000.

the NPV of the project is as follows:

((26777400+70000)/(1.17)^3)+(35705400/(1.17)^2)+(29771400/(1.17))

=68,291,645

Since, the project has a positive NPV of $ 68,291,645, therefore the company should go ahead with this new computer project.

Related Questions

Navigate

• Browse (All)
• Browse L
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.