Case study 1

The Board of Directors of Hollandia Inc. is considering the acquisition of a new project. The project is priced at $650,000 but would require $15,000 in transportation costs and $35,000 for installation. The project has a useful life of 10 years but will be depreciated using straight-line depreciation over the next 5-years. It is expected to have a salvage value of $25,000 at the end of 10 years. The project would increase revenues by $200,000 per year and increase yearly operating costs by $30,000 per year. Additionally, the project would require a $50,000 increase in net working capital. The firm's tax rate is 30%, and the project's cost of capital is 12%.

A. Calculate the tax effect and incremental cash flows for Y0 to Y10.

B. Calculate the net present value of the project. Explain if the company should accept this project or not.

C. Calculate the internal rate of return of the project.

D. Calculate the payback period and discounted payback period of the project.

E. Calculate the profitability index of the project.