Precision Dyes wants to supply 100,000 bottles of a specialized industrial color to its customer per year, who wants to pay $250 per bottle. The contract will last for 4 years. It will cost Precision $6 million to install the necessary equipment to start production. The equipment can be depreciated using the 5-year MACRS method (20%, 32%, 19.20%, 11.52%, 11.52%, 5.76%). Precision estimates that in four years, this equipment can be salvaged for $200,000. The fixed production costs will be $4 million per year, and the variable production costs should be $150 per bottle. Precision also needs an initial investment in net working capital of $600,000, all of which will be recovered when the project ends. The tax rate is 22 percent and Precision requires a return of 12 percent. Should Precision go forward with this deal? Why? Explain
Precision Dyes wants to supply 100,000 bottles of a specialized industrial color to its customer per year, who wants to pay $250 per bottle. The contract will last for 4 years. It will cost Precision $6 million to install the necessary equipment to start production. The equipment can be depreciated using the 5-year MACRS method (20%, 32%, 19.20%, 11.52%, 11.52%, 5.76%). Precision estimates that in four years, this equipment can be salvaged for $200,000. The fixed production costs will be $4 million per year, and the variable production costs should be $150 per bottle. Precision also needs an initial investment in net working capital of $600,000, all of which will be recovered when the project ends. The tax rate is 22 percent and Precision requires a return of 12 percent. Should Precision go forward with this deal? Why? Explain
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Precision Dyes wants to supply 100,000 bottles of a specialized industrial color to its customer per year, who wants to pay $250 per bottle. The contract will last for 4 years. It will cost Precision $6 million to install the necessary equipment to start production. The equipment can be depreciated using the 5-year MACRS method (20%, 32%, 19.20%, 11.52%, 11.52%, 5.76%). Precision estimates that in four years, this equipment can be salvaged for $200,000. The fixed production costs will be $4 million per year, and the variable production costs should be $150 per bottle. Precision also needs an initial investment in net working capital of $600,000, all of which will be recovered when the project ends. The tax rate is 22 percent and Precision requires a return of 12 percent. Should Precision go forward with this deal? Why? Explain
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