2. Alternatively, it can go into production for an initial investment in equipment of $4,250,000. The equipment will be depreciated using the MACRS 7-Year schedule, and will be sold after six years for $200,000. The firm estimates production costs equal to $1.75 per piece to start. It is also expected that the cost to produce this off-road gear will increase with the rate of inflation. The firm believes that the off-road tire repair piece can be sold for $3.61 each. The firm also expects to increase the sale price with the rate of inflation. The firm believes that, starting in Year 0, working capital at each date must be maintained at a level of 10% of the following year's sales forecast. All working capital will be recovered at the end of the project. The firm's tax bracket is 35%, and inflation is expected to be 2.15% per year for the foreseeable future. The unit sales forecast is given in the table below. Year Units 0 1 2 3 600,000 700,000 800,000 800,000 700,000 200,000 4 5 6 Calculate the following for each project: -Net Present Value -Profitability Index -Internal Rate of Return Create a NPV matrix, for each project, assuming a plus or minus 5% adjustment to the following four inputs: a -Purchase Price of Asset -Salvage Value -Year 1 Sell Price Per Unit -Year 1 Cost Per Unit 2. Alternatively, it can go into production for an initial investment in equipment of $4,250,000. The equipment will be depreciated using the MACRS 7-Year schedule, and will be sold after six years for $200,000. The firm estimates production costs equal to $1.75 per piece to start. It is also expected that the cost to produce this off-road gear will increase with the rate of inflation. The firm believes that the off-road tire repair piece can be sold for $3.61 each. The firm also expects to increase the sale price with the rate of inflation. The firm believes that, starting in Year 0, working capital at each date must be maintained at a level of 10% of the following year's sales forecast. All working capital will be recovered at the end of the project. The firm's tax bracket is 35%, and inflation is expected to be 2.15% per year for the foreseeable future. The unit sales forecast is given in the table below. Year Units 0 1 2 3 600,000 700,000 800,000 800,000 700,000 200,000 4 5 6 Calculate the following for each project: -Net Present Value -Profitability Index -Internal Rate of Return Create a NPV matrix, for each project, assuming a plus or minus 5% adjustment to the following four inputs: a -Purchase Price of Asset -Salvage Value -Year 1 Sell Price Per Unit -Year 1 Cost Per Unit
