Clover Company plans to invest $8 million in a new product line. Clover anticipates that the product will sell for $20 per unit, variable costs will be $8 per unit, and annual fixed operating costs (excluding depreciation) will be $750,000. Clover expects sales to be 200,000 units in year 1; sales are then expected to grow by 10% per year for years 2, 3, and 4; sales in years 5, 6, and 7 are expected to remain at the year 4 level; starting in year 8, and continuing through year 10, sales are expected to decrease by 25% per year. Clover plans to close the plant and discontinue the product line at the end of year 10, realizing zero salvage value. The required rate of return on the investment is 12%, and the company uses straight-line depreciation for tax purposes. Clover'stax rate is 30%.
Required:
a. Calculate the annual net after-tax cash flows for each of the 10 years of the proposed product line.
b. Use Excel to calculate the net present value of the project.
c. Use Excel to calculate the IRR of the project.