Orange Inc., a technology company is considering the feasibility of a new line of selfie toasters which aims at making breakfast a more interesting experience.
“Why eat plain old toast when you could make toast with a picture of your face (or someone else’s face) on it. This selfie toaster lets you do just that ”
Based on a market survey, Orange Inc. projects unit sales as follow
Year
Unit sales
1 3,000
2 5,000
3 6,000
4 6,500
5 6,000
6 5,000
7 4,000
8 3,000
The new selfie toaster will sell for $120 per unit to start. When competition catches up after three years, however, Orange Inc anticipates that the price will drop to $110.
The selfie toaster project will require $20,000 in net working capital at the start. Subsequently, total net working capital at the end of each year will about 15% of sales for that year. The variable cost per unit is $60, and total fixed costs are $25,000 per year. A product like this typically only has an 8 year-life.
It will cost about $800,000 to buy the equipment necessary to begin production. This equipment will be depreciated using the straight-line method. There is no salvage value. The corporate tax rate is 34%
i. The required return in 15%. Based on the information, should Orange Inc. proceed with this project? Calculate NPV and IRR
ii. Re-evaluate the NPV and IRR with the assumption that the variable cost of per unit if the cost is expected to increase by $70 per year. What if it decreases by $50 per year?