You are considering a new product launch. The project will cost $680,000, have a four-year...
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Accounting
You are considering a new product launch. The project will cost $680,000, have a four-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 100 units per year, price per unit will be $19,000, variable cost per unit will be $14,000, and fixed costs will be $150,000 per year. The required return on the project is 15%, and the relevant tax rate is 35%. Ignore the half-year rule for accounting for depreciation.
(ii) Profitability Index (PI) (1 mark)
(iii) Payback period (in years) (1 mark)
(iv) Discounted payback period (in years) (1 mark)
(v) Internal Rate of Return (IRR in %) (1 mark)
(vi) Average Accounting Return (AAR in %) (2 marks)
Hint: Net Income = {[(Price variable cost)*Quantity Sold] Fixed Costs Depreciation} * (1 Tax rate)
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