Evaluation of new product Delpat Corporation is negotiating the purchase of a patent on a highly efficient water heater for home and industrial use. The company is operating near capacity and would need a new facility to start production. The estimated cost of the new plant is $6,500,000. The expected useful life is 15 years with an estimated residual value of $2,000,000. The unit manufacturing costs are expected to be as shown on the following page:

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REQUIRED Direct material Direct labor... Variable overhead. Variable selling and administrative $35 per unit 25 per unit 8 per unit 12 per unit The water heaters are expected to sell for $125 each. Because of intense competition, heavy promotional costs are needed to penetrate the market. The company estimates that if it spends $400,000 per year for advertising during the first 2 years and $100,000 per year thereafter, it should be able to sell the following number of units: Year 1.... Year 2. Year 3-15 25,000 30,000 40,000 per year Other fixed costs, including straight-line depreciation, are expected to be $600,000 per year. The company requires a 28 percent return before taxes on any new ventures. However, it will accept a smaller return if the project has a payback of 4 years or less. a. Compute the net present value for the project and determine if the project is acceptable. b. Compute payback on the project and determine if the project is acceptable. Computer requirement Calculate the internal rate of return (IRR) for this project.