CRE Electronics is a midsized electronics manufacturer. When the company was founded 70 years ago, the company originally repaired radios and other household appliances. Over the years, the company expanded into manufacturing and is now a reputable manufacturer of various electronic items. You have been hired by the company's finance dept.

One of the major revenue producing items manufactured by CRE is a personal digital assistant (PDA). CRE currently has one PDA model on the market and sales have been excellent. However, as with any electronic item, technology changes rapidly, and the current PDA has limited features in comparison with newer models. CRE spent $750,000 to develop a prototype for a new PDA that has all the existing features but adds new features such as cell phone capability. The company has spent an additional $200,000 for a marketing study to determine the expected sales figures for the new PDA.

CRE can manufacture the new PDA for $155 each in variable costs. Fixed costs are estimated to run at $4.7 million a year. The estimated sales volume is 74,000, 95,000,

125,000, 105,000 and 80,000 per each year for the next five years, respectively. The unit price of the new PDA will be $360. The necessary equipment can be purchased for $21.5million and will be depreciated on a 7-year MACRS schedule. It is believed that the value of the equipment in five years will be $4.1 million.

As previously stated, CRE currently manufactures a PDA. Production of the existing model is expected to be terminated in two years. If CRE does not introduce the new PDA, sales will be 80,000 units and 60,000 units for the next two years, respectively. The price of the existing PDA is $290 per unit, with variable costs of $120 each and fixed costs of $1,800,000 per year. If CRE does introduce, the new PDA, sales of the existing PDA will fall by 15,000 units per year, and the price will have to be lowered to $255 each. Net working capital for the PDAs will be 20% of sales and will occur with the timing of the cash flows for the year; for example, there is no initial outlay for NWC, but changes in NWC will first occur in year 1 with the first year's sales.

CRE has a 35% tax rate and a 10% cost of capital.

MACRS 7 years schedule

You have been asked to prepare the following:

1. Calculate the IRR of the project, should the project be accepted?

2. Calculate the NPV of the project, should the project be accepted?

3. If there are any conflicts in your answers to the 2 methods, please indicate your overall decision about whether or not to accept the project. It is not sufficient to state NPV is superior.