GM is considering producing a new car. GM’s currentnet income for each of the next 6 years is assumed to be$100 million, which we assume to be received on June 30of the years 2004–2009. The tax rate...

GM is considering producing a new car. GM’s currentnet income for each of the next 6 years is assumed to be$100 million, which we assume to be received on June 30of the years 2004–2009. The tax rate is 40%. Assume thatno other GM projects involve depreciation. The fixed costof developing the new car will be between $20 million and$40 million, with a most likely value of $25 million. Theentire fixed cost is incurred on June 30, 2004 and isdepreciated on a straight-line basis during the years2005–2009. All future cash flows are received midyear. Thecar is assumed to be sold during the years 2005–2009.Forecast for 2005 unit sales is 15,000. Past forecasts andactual sales during the first year of similar models are asshown in Figure 65.During the years 2006–2009, sales are assumed to decayat the same rate each year. This rate will be between 5% and20%, with a 12% decay rate twice as likely as an 8% decayrate and a 16% decay rate three times as likely as an 8%decay rate. During 2005, the car will sell for $13,000. Theprice will increase by the same percentage each year, with1%, 2%, and 3% price increases being equally likely. During2005, variable costs are $11,000. During 2006–2009,variable costs will increase by the same percentage, withincreases of 2%, 4%, and 6% being equally likely. Discountcash flows at 15%. Should GM produce the car?

Extracted text: FIGURE 65 K Forecast 26000 35000 14000 48000 62000 11 Actual 20000 30000 12 13 14 10000 15 40000 16 50000