Venture Tech. Inc. has just completed market research on a new smartphone at the cost of $350,000. This new phone is lighter and smaller, though more feature rich, than its existing product. New product sales are estimated at 1,000,000 units per year with a contribution margin of $40. However, if Venture Tech. introduces its new product, sales of its existing smartphone will fall from 600,000 to 250,000 units per year. Its existing product has a contribution margin of $30.
The company will retool one of its existing manufacturing facilities to produce the new model. The one-time retooling cost is $3,700,000. There will also be $80,000 in retraining costs incurred for workers who lost their jobs manufacturing the existing product. The new facility is expected to increase fixed cash costs of $150,000 per year. Research and development on the new phone took two years at a cost of $1,900,000. The R&D group also paid an external company for use of their advanced testing facilities at a further cost of $100,000.
Venture Tech has also spent $90,000 in the design of a new corporate headquarters. Building the headquarters will cost $4,000,000.
For capital budgeting purposes, calculate the project’s:
1. Initial cost
2. Annual cash flows before tax