Question
Banana Ltd. is a company that produces personal computers. It has been in operation for two years and is at capacity. It is considering an
Banana Ltd. is a company that produces personal computers. It has been in operation for two years and is at capacity. It is considering an investment project to expand its production capacity. The project requires an initial outlay of $1,000,000: $800,000 for new equipment with an expected life of four years and $200,000 for additional working capital. The selling price of its PCs is $1,200 per unit, and annual sales are expected to increase by 1,000 units as a result of the proposed expansion. Annual fixed costs excluding depreciation of the new equipment will increase by $100,000, and variable costs are $800 per unit. The new equipment will be depreciated over four years using the straight-line method with a zero salvage value. The hurdle rate for the project is 12% per year, and the company pays income tax at the rate of 40%.
- What is the projects NPV?
- What is the IRR of the project? Shall the project be accepted or rejected?
- At what volume of sales would the NPV just break even?
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