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2. Iceberg Ice Lollies is starting a new operation in fresh fruit lolly-making, which will last for about five years. The initial cash injection,

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2. Iceberg Ice Lollies is starting a new operation in fresh fruit lolly-making, which will last for about five years. The initial cash injection, mostly for the machine, will be $1,600,000. These products are sold in packets of 12 by the hundred (cent). The projected sales in mils for the six years are according to the figures shown below. Total fixed costs are $1,200,000 per year, variable production costs are $295/cent, and the products are priced at $360/ cent. The equipment will be depreciated over three year using the MACR table provided and is not expected to have a salvage value. The effective tax rate is 45 percent, and the required rate of return is 42 percent. What is the NPV of this project? Based on this, what is the IRR? (Note - the tables can be copied to Excel, so you can use the IRR Function for a more exact figure) What do these figures tell us? Year Units 1 2 3 4 5 Rev/Unit Cost/ Gross Income Fixed costs Depreciation Taxable Taxes (45%) After tax Income Revenues Cost/unit Fixed Costs Taxes

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