Question:

You are an analyst for a sporting goods corporation that is considering a new project which will take advantage of excess capacity in a existing plant. The plant has a capacity to produce 50000 tennis racquets, but only 25000 are being produced currently though sales of the rackets are increasing 10% a year. You want to use some of the remaining capacity to manufacture 20000 squash rackets each year for the next ten years (which will use up 40% of the total capacity), and this market is assumed to be stable (no growth). An average tennis racquet sells for $100 and costs $40 to make. The tax rate for the corporation is 40% and the discount rate is 10%. Is there an opportunity cost involved?