Problem:
Molecugen has developed a new kind of cardiac diagnostic unit. Owing to the highly competitive nature of the market, the sales department forecasts demand of 5,000 units in the first year and a decrease in demand 10% a year after that. After 5 years, the project will be discontinued with no salvage value. The marketing department forecasts a sales price of $15 a unit. Production estimates operating costs of $5 a unit, and the finance department estimates general and administrative expenses of 15,000 a year. The initial investment in land is 10,000 and other no depreciable setup costs are 10,000.
Q1. Is the new project acceptable at a cost of capital of 10% (use straight line depreciation over the life of the project and a tax rate of 35%)?
Q2. If the marketing department had forecast a decline of 15% a year in demand, would the project be acceptable?
Q3. If the market department had forecast a decline in sales price of 10% a year, along with the 15% annual decline in demand predicted in (2) would the project be acceptable?
Q4. If the prices decline by 10% a year, the marketing department estimates that demand will be a constant 5,000 units a year. Is the project acceptable?