Question
ABC company is considering a new investment that will cost 50,000 to produce a new product that the president of the company has invented. The
ABC company is considering a new investment that will cost 50,000 to produce a new product that the president of the company has invented. The marketing dept of the company anticipates the new cash flows from the investment will be 10,000, 12,000, 12,000 12,000 and 10,000. The newly elected President of the United States has reinstituted the old investment tax incentive for corporations which gives an investment tax credit of 10% of the cost of an investment applicable in the second year after implementation of the investment. It will cost the company 2000 to install the new equipmment in the factor to get it going. The operations officer engineer thinks that the residual value of the equipment will be 10000. That maintenance costs will be 1000 in years 2 and 4 only. The corporate controller says that the accounting department has been using DDB appreciation for all new equipment. Assuming the company can sell bonds at 10% to pay for this investment, is this a good investment for the company? Whether or not, what is the IRR of the new investment?
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