After that time they believe there would be no more sales of the product as newer
products become available. The EnviroLight is expected to cost $14.50 each to
manufacture (variable cost). In addition, fixed production costs are estimated at $1.7
million per year. The manufacturing equipment necessary to produce the lights costs
$2,800,000 to buy and would be depreciated at a 30 percent CCA rate. The cost of
installing the equipment is $650,000, which will be covered by the supplier. The
manufacturing equipment is expected to have a net salvage value equivalent to the ending
balance of the UCC at the end of year four (no income tax effects apply). The required
level of net operating working capital is 20% of the next year’s sales revenue (Hint: you
will need to determine the required investment in Net Operating Working Capital -
NOWC - for the business starting in year 0 until year 4). The NWC will be recovered at
the end of the project. The company’s marginal income tax rate is 25 percent.
Inflation adjustment: Inflation is expected to be 2% per year, starting in the second year
of the project (Year 2 - 2027). Price per unit, variable cost, and fixed cost are adjusted by
inflation.