The new power mulcher will be priced to sell at $120 per unit to start. When the competition catches up after three years, however, MMCC anticipates that the price will drop to $110.

The power mulcher project will require $20,000 in net working capital at the start. Subsequently, total net working capital at the end of each year will be about 15 percent of sales for that year. The variable cost per unit is $60, and total fixed costs are $25,000 per year.

It will cost about $800,000 to buy the equipment necessary to begin production. This investment is primarily in industrial equipment, which qualifies as seven-year MACRS property. The equipment will actually be worth about 20 percent of its cost in eight years, or .20 X $800,000 = $160,000. The relevant tax rate is 34 percent, and the required return is 15 percent. Based on this information, should MMCC proceed?

Operating Cash Flows There is a lot of information here that we need to organize. The first thing we can do is calculate projected sales. Sales in the first year are projected at 3,000 units at $120 apiece, or $360,000 total. The remaining figures are shown in Table 10.9.


Unit Price

Unit Sales


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