The HEP marketing vice-president estimates that the annual sales would be 15000 units if the device%u2019s selling price is $2000 each. The engineering
department has determined that the firm would need no additional manufacturing or storage space; it would just need the new machinery required to manufacture
the devices. It was projected that all the necessary equipment should be purchased and installed in late 2001. The estimated cost of the equipment is $9.5
million not including the $500000 that HEP would have to pay for its shipping and installation. The equipment estimated economic life is 4 years after which
the equipment would have a market value of $2 million and HEP will use MACRS method to calculate depreciation.
The project would require an initial increase in net working capital needs of $4 million. The variable manufacturing costs will total 60% of sales and fixed
overhead costs excluding depreciation will be $5 million per year. HEP is a firm with 40% marginal tax rate 3 years payback period and 15% required rate of
return. The company%u2019s policy is to assume for capital budgeting purposes that operating cash flows occur at the end of the fiscal year.
Use the following criteria for final recommendations;
-Discounted Pay back period
-Net Present Value
-Internal rate of Return