Answered step by step
Verified Expert Solution
Question
1 Approved Answer
17) Rum Co has asked you to evaluate the following proposal. Rum Co is contemplating the purchase of a new machine for $1,500,000 to produce
17) Rum Co has asked you to evaluate the following proposal. Rum Co is contemplating the purchase of a new machine for $1,500,000 to produce a new rum drink. This machine would be used for 4 years, after which the machine would be sold for a salvage value of $20,000. Launch of the new rum drink will also require a $100,200 increase in working capital - an increase which will be recovered at the end of the 4 years (when the drink is pulled from the market and the machine reaches the end of its useful life). Over this 4-year product life, Rum Co estimates incremental annual sales of $660,000 and increased annual cash-costs of $12,500. Based on Rum Co's discount rate of 15.0% and a marginal tax rate of 34% please answer the following for Rum Co's management: a) [2 pts] What is the total initial investment for this project? b) [2 pts] What is the project's incremental after-tax cash flow in year 1? c) [2 pts] What is the project's incremental after-tax cash flow in year 4 ? d) [1 pt] If the calculated IRR for this project is 16.4%, should Rum Co accept this project? Why - please explain your answer. e) 10 Extra Credit Points: What is the Net Present Value of this project
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started