Question:
Sporty Inc, a sport equipment manufacturer, is considering a new project that will take advantage of excess capacity in an existing plant. The plant has a capacity to produce 50,000 tennis rackets, but only 25,000 are currently being produced. The sales of the tennis rackets, however, are expected to increase 10% a year. The firm wants to use some of the remaining capacity to manufacture 20,000 squash rackets each year for the next 10 years, which will use up 40% of the total capacity. This market is assumed to be stable (no growth). A tennis racket costs $40 to make and sells for $100. The corporate tax rate is 40% and the discount rate is 10%. Calculate the opportunity cost of this project.