Question
EMCC has developed a new product that is priced to sell for $3,000 each. The company expects to sell 5,000 units annually over the next
EMCC has developed a new product that is priced to sell for $3,000 each. The company expects to sell 5,000 units annually over the next 5 years.
The company needs to invest $5 million in new manufacturing facilities and requires a working capital of $800,000.
The new facilities will be depreciated at a declining balance CCA rate of 30% (50% rule applicable).
The expected salvage value at the end of the 5th year is $2.5million. The manufacturing cost of the product is $1,250 per unit, excluding depreciation expenses.The operating and maintenance costs are expected to run to $7.0 million per year. EMCC has a combined incremental income tax rate of 35%.
The $5 million capital will be borrowed from a bank at 10% interest and will be repaid in 5 equal annual payments.
If MARR is 25%, compute the NPV to determine if the project should be undertaken or not.
What is the project IRR?
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