5) Block Hirt (BH) is upgrading to more efficient production equipment. The new equipment will cost $2,000,000 and shipping costs of $10,000 will be incurred. Because the industry is changing rapidly, the equipment will be obsolete in 4 years, however, can be sold for scrap for $100,000. As a result of the new equipment, total sales will increase next year by 20% over the current amount of 110,000 units and stay at this new level for each year of the project. The sales price will remain unchanged at $30 per unit. Because production will be increasing, inventory levels will need to be increased by $40,000 and accounts receivable will also increase by $30,000. Rather than paying suppliers within 10 days, BH will move to 30-day payments which will increase accounts payable by $20,000. The equipment will be depreciated for tax purposes at CCA rate of 20%. The companys tax rate is 40% and the company requires a rate of return of 7% on all capital expenditure projects.

a) Based on a NPV analysis, should the project be accepted or rejected? Show your work, NO EXCEL. (17 Marks)

b) What can you say about the IRR (Internal Rate of Return) of the project? No calculations required. (1 Mark)