Abitibi Pulp Ltd $\bullet$ Marketing Analysis Indicates Technology Companies in Silicon Valley Will Buy

question 80

Essay

Abitibi Pulp Ltd.is considering a new product line for its existing table business.It has developed a new type of computer table that will protect the computer during an earthquake.It would like you to analyze the feasibility of the venture and suggest a break-even bid price.It provides you with the following details:
$\bullet$ Marketing analysis indicates technology companies in Silicon Valley will buy 250 tables each year for four years.
$\bullet$ The consultant who did the marketing research charged a fee of $15,000.
$\bullet$ The firm estimates that the variable cost per table is $100.For this project the firm would require extra factory space at a cost of $25,000 per year, overhead costs such as heating and lighting would amount to $4,000 per year, and wages and salaries would total $75,000 per year.
$\bullet$ The machinery required for the new product line would cost $200,000, and have a salvage value of $50,000 at the end of 4 years.The machinery belongs to CCA class 16 and has a 15% declining balance rate.The asset class will remain open and the half-year rule will apply in the first year.
$\bullet$ Additional working capital of $150,000 would be required to get the project started.
$\bullet$ The corporate tax rate is 40% and the required rate of return is 12%.
What price should Abitibi charge for each table?

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Definitions:

Cash Discount

A reduction in the invoice amount by the seller, granted to the buyer for early payment within a specified period.

Credit Cost Curve

The relationship between the cost of credit for a borrower and the default risk of the borrower, indicating how the cost of borrowing money increases with higher risk.