Budweiser is thinking about making wine

• Expected sales per unit
  • 230,000 bottles sold in the first year. Sales revenue declines 10% per year (ie, sales growth = -10%)
• Proposed selling price per bottle = $5.10. Variable cost per bottle = $2
• Fixed costs = $230K/year in maintenance and labor
• Budweiser also expects to lose $300K pretax per year (revenue net of expenses) from beer sales as people switch from beer to wine
• Working capital necessary = $50K
• Wine-making equipment would cost $750K, plus $50K in modifications required on the assembly line (included in depreciable basis)
  • depreciated 5-year MACRS
• After five years, project ends as everyone realizes Budweiser wine is disgusting all remaining working capital recouped
  • wine-making equipment sold for $400,000
• Tax rate = 30%
• Assume any negative taxes can be treated as an immediate tax credit. (=treat negative taxes as a positive CF.)

Required return rate = 10%. Calculate the NPV and the IRR of the project. Should the company pursue this project?