Household Energy Products (HEP) wants to decide whether it should proceed with full-scale production of the appliance-control device. The engineering department has determined the firm would need additional storage space. HEP has already built a plant, which costs $2 million. The necessary equipment would be purchased and installed late in 2011. The invoice cost is $9.5 million, which does not include the $500,000 that would have to be paid for shipping and installation.
The marketing vice president believes that annual sales will be 15,000 units if each unit is priced at $2,000. The production department has estimated that variable manufacturing costs will total 60 % of sales and fixed overhead costs will be $5 million per year.
The equipment would fall into (MACRS) 5-year class for the purpose of depreciation (20%, 32%, 19%, 12%, 11% 6%). The project will require an initial increase in net working capital equal to $4 million, primarily because the raw materials required to produce the devices will significantly increase the amount of inventory HEP currently holds. The investment necessary to increase net working capital will be made on Dec. 31st, 2011. The project's estimated economic life is four years. At the end of that time, the equipment is expected to have a market value of $2 million and a book value of $1.7 million. HEP's marginal tax rate is 40 % and its costs of funds is 15%. If it is determined to be an acceptable investment, manufacture of the new product will begin on Jan. 2, 2012.