Kidco Corp. designs and produces clothes aimed at the pre-teen market. Most of its products have a short life, given the rapidly changing tastes of pre-teens. It’s January 2017, and Kidco is considering a new clothing line. The product requires purchasing a new equipment at a cost of $7 million. The equipment will be depreciated on a MACRS four-year schedule over the project’s four-year economic life, with rates of 33 percent, 45 percent, 15 percent, and 7 percent for years 1 through 4. The equipment’s expected salvage value is negligible. Revenues are expected to be $5.2 million per year and operating expenses excluding depreciation are expected to total $2.5 million per year. Kidco’s marginal tax rate is 40 percent and its cost of capital is 12.5 percent. No additional investments in working capital are required. Should Kidco produce this product?
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