Scooby Industries just received a patent on a new cancertreatment. The firm must now decide if it is worthwhile to startmanufacturing the drug. To do this, the firm must buy new machinesfor a total of $860,000, which it will depreciate on astraight-line basis (to zero) over the next 7 years (Years 1 and 7are complete years! Do not use the ½ year convention!). Scoobyexpects the machine to have no (economic) salvage value in 7 years,so it will be scrapped at that time. In each of the next 7 years,the firm expects to sell 11,000 units of this new treatment at aper unit price of $55. The variable cost of producing, marketing,and distributing this treatment will be $10 per unit, and the firmwill have fixed costs (excluding depreciation) of $200,000 eachyear. The firm's tax rate is 35% (on both income and capitalgains), and the discount rate is 10%. A. What is the incrementalNet Income and cash flow in each of the next seven years? B.Calculate the NPV and the IRR for this project. Based on thisinformation, should the company start manufacturing the drug? C.Calculate the NPV break-even point (in units) of this project.
