As a CFO of ABC Corporation, you have to analyze a proposal for establishing a small production line of high-quality oil filters for general aviation aircraft.

ABC has a building that was previously used for a research lab but now is empty because last year the lab was relocated to Arizona. The building is suitable for the production line. ABC does not consider selling the building but the corporation can put it for a lease and collect $10,000 per year.

The project requires an investment of $1.2 mln in production machinery. The corporation applies straight-line depreciation to the production machinery over 5 years to a book salvage value of $200,000. ABC anticipates that the machinery can actually be sold in 5 years for $300,000.

The revenues and operating expenses related to the production line are presented in Table 1. The project will initially require $350,000 in working capital that will be fully recovered in year 5. The working capital requirements will vary from year to year (see Table 1).

Last year the corporation sold some of the relocated lab equipment for $100,000. ABC intends to use the proceeds for the oil filters project.

In five years the corporation will close down the production line and will concentrate on multiple research projects for NASA.

The firms marginal tax rate is 35 percent and the discount rate is 14 percent.

1. Calculate NPV and IRR of the project.
2. Should ABC accept or reject the project? Why yes or why not?
3. Would you change your decision if the discount rate were 12%? Why yes or why not

Year:	0	1	2	3	4	5
Capital investment	$ 1,200,000.00
Salvage value (after tax)
Working capital	$ 350,000.00	$ 400,000.00	$ 500,000.00	$ 600,000.00	$ 500,000.00	0
Change in working capital
Revenues		$620,000.00	$744,000.00	$892,800.00	$1,071,360.00	$1,285,632.00
Operating expenses		$ 300,000.00	$ 360,000.00	$ 432,000.00	$ 518,400.00	$ 622,080.00
Depreciation
Pretax profit
Tax (0.35%)
Profit after tax
Cash flows from operations
Opportunity costs
Net cash flow
NPV
IRR