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A company currently produces 90 machines per year that each sell for $250,000. The company is...

A company currently produces 90 machines per year that each sell for $250,000. The company is financed totally with equity that costs 12% per year and its assets total $8 million. The variable cost of producing each machine is $200,000 and the fixed production costs are $3 million per year. Because of tax loss carry-forwards, the company’s effective tax rate is 0%. The company is considering a $4 million investment that would allow sales to increase by 25 machines per year, decrease variable costs by $10,000 per machine, and increase fixed costs by $3 million. What would be the rate of return on the investment? Should the company make the investment? No

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Answer #1

Return on investment= -15%

No,
Explanation:
As Return on investment is negative, we should not accept the new investments.

old New Case II Case I 90x (025-0.2) (90+25) (0-25-002 cenits X (Sales price variable ) price 4-5 +0.01) = 6.9 - Fixed cost -

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