Question: Scooby Industries just received a patent on a new cancer treatment. The firm must now decide if it is worthwhile to start manufacturing the drug. To do this, the firm must buy new machines for a total of $860,000, which it will depreciate on a straight-line basis (to zero) over the next 7 years (Years 1 and 7 are complete years! Do not use the ½ year convention!). Scooby expects the machine to have no (economic) salvage value in 7 years, so it will be scrapped at that time. In each of the next 7 years, the firm expects to sell 11,000 units of this new treatment at a per unit price of $55. The variable cost of producing, marketing, and distributing this treatment will be $10 per unit, and the firm will have fixed costs (excluding depreciation) of $200,000 each year. The firm's tax rate is 35% (on both income and capital gains), and the discount rate is 10%.

1. What is the incremental Net Income and cash flow in each of the next seven years?
2. Calculate the NPV and the IRR for this project. Based on this information, should the company start manufacturing the drug?
3. Calculate the NPV break-even point (in units) of this project.

Price: $2.99

Solution: The downloadable solution consists of 2 pages
Deliverable: Word Document