Affinity Inc is considering a 3-year project with an initial equipment cost of $618,000. The companys R&D department spent $50,000 in developing the process improvement. The project will not directly produce any sales but will reduce operating costs by $265,000 a year. The equipment is depreciated straight-line to a zero book value over the life of the project. At the end of the project, the equipment will be sold for an estimated $60,000. The tax rate is 34 percent and applies to both regular income and capital gains/losses. The project will require $23,000 in extra inventory for spare parts and accessories. (5 points)

" I NEED help finding B AND C "

a) Should this project be implemented if Affinity requires a 9 percent rate of return?

Annual operating cash flow = Cost savings - Depreciation -Tax + Depreciation

= 265000- [618000/3 ] - [ 265000-[618000/3]*34%] + -[618000/3 ] = 244,940

NPV = Present value of cash inflows - Initial cash outlay

244,940*PVIFA,9%,3 + 60,000(1-.34)* PVIF,9%,3 + 23,000*PVIF,9%,3 - [618000+23000]

244940*2.531295 + 39,600*.772183 + 23,000*.772183 - [618000+23000]

620,015.31+30,578.45+17,760.22 - [618000+23000]

= 27,354 npv

The npv is positive and can be considered to be implemented

b) What is the IRR of the project?

c) If the cost of capital for Affinity were to double, how would that impact your decision?