AAA Corp. currently has one? product, high-priced lawn mowers. AAA Corp. has decided to sell a...

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AAA Corp. currently has one? product, high-priced lawn mowers.AAA Corp. has decided to sell a new line of? medium-priced lawnmowers. The building and machinery for producing this new line isestimated to cost ?$10,000,000 and it will be depreciated down tozero over 20 years using? straight-line depreciation.? Also, aninvestment today on working capital in the amount of ?$4,000,000 isneeded. The working capital will be recovered at the end of theproject. Sales for the new line of lawn mowers are estimated at?$29 million a year. Annual variable costs are 60?% of sales. Theproject is expected to last 10 years. In addition to the productionvariable? costs, the fixed costs each year will be ?$3,000,000. Thecompany has spent ?$1,500,000 in a marketing study that determinedthe company will lose ?$11 million in sales a year of its existing?high-priced lawn mowers. The production variable cost of thesesales is ?$9 million a year. It is expected that at the end of the?project, the building and machinery can be sold for ?$5,000,000.The tax rate is 20 percent and the cost of capital is 6%.

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4.0 Ratings (411 Votes)

A Plant and equipment 10000000 Increase in NWC 4000000 Initial outlay for the project 14000000 B Sales 29000000 Variable cost 60 17400000 Fixed costs 3000000 Depreciation See Answer

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AAA Corp. currently has one? product, high-priced lawn mowers.AAA Corp. has decided to sell a new line of? medium-priced lawnmowers. The building and machinery for producing this new line isestimated to cost ?$10,000,000 and it will be depreciated down tozero over 20 years using? straight-line depreciation.? Also, aninvestment today on working capital in the amount of ?$4,000,000 isneeded. The working capital will be recovered at the end of theproject. Sales for the new line of lawn mowers are estimated at?$29 million a year. Annual variable costs are 60?% of sales. Theproject is expected to last 10 years. In addition to the productionvariable? costs, the fixed costs each year will be ?$3,000,000. Thecompany has spent ?$1,500,000 in a marketing study that determinedthe company will lose ?$11 million in sales a year of its existing?high-priced lawn mowers. The production variable cost of thesesales is ?$9 million a year. It is expected that at the end of the?project, the building and machinery can be sold for ?$5,000,000.The tax rate is 20 percent and the cost of capital is 6%.