2. Fashion Corp. has come up with a new product. One year ago, the company paid $120,000 for a marketing survey to determine the viability of this product. It is estimated that the product will generate sales of $800,000 per year for the next 4 years (= project life). The fixed cost associated with this product will be $400,000 per year, and the variable cost will amount to 20% of annual sales. To produce the product, the company needs to buy a fixed asset that costs $360,000, which will be fully depreciated by the straight-line method over 6 years. It is estimated that the fixed asset will have a salvage value of $160,000 at the end of the project (Year 4). It is also estimated that the project will need the working capital investment (= 10%*annual sales) in the beginning of each year. Assume that the tax rate is 30%. Management of Fashion Corp. has determined that 20% is an appropriate discount rate, given the risk of this project.

a) Calculate the NPV using excel. Show formulas. Based on the NPV method, should we accept the project?

b) Calculate the IRR using excel. Show formulas. Based on the IRR method, should we accept the project?