Question
As the finance manager of a company, you are presented with the following project. The company is considering the purchase of a new piece of
As the finance manager of a company, you are presented with the following project. The company is considering the purchase of a new piece of equipment which would cost $210,000. This equipment will have a five year useful life and have a salvage value of $10,000 at the end of the five year period. This piece of equipment would be used to produce more shelves. It is estimated that the company will be able to produce 10,000 shelves per year. The company also estimates the equipment will also have annual maintenance costs of $10,000 per year. The company estimates that they can sell the shelves for $25 each. They also estimate that the variable cost per shelf is $15 per shelf.
Working Capital requirements for the project are as follows:
Year 0 = $10,000
Year 1 = $15,000
Year 2 = $17,000
Year 3 = $15,000
Year 4 = $10,000
It is estimated that at the end of the five year period, the company will be able to sell the equipment for $50,000. The company has a 30% marginal tax rate and has a required rate of return of 15%.
Would you accept this project (support your answer with NPV/IRR)?
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