1. ] Enterprise Corporation is considering an investment in a new product line. The investment would require an immediate outlay of $250,000 for equipment and an immediate investment of $75,000 in working capital. The investment is expected to generate incremental sales of $200,000 in year 1, $300,000 in year 2, and $400,000 in year 3 and 350,000 in year 4. The estimated contribution margin percentage for the product line is 50%. In addition, the new equipment will increase Enterprises fixed costs by $40,000 per year.

The equipment would be scrapped (for no salvage) at the end of the fourth year and the working capital would be recovered. The equipment would be fully depreciated by the straight-line method over its four-year life.

Enterprise faces a 40% tax rate. Management has set a minimum rate of return of 12% before capital investments are considered any further.

Required:

1. [16 points] Compute the NPV of the investment. Use Form 5-A for your calculations.

NPV: _______________

2. [3 points] Compute the project after-tax pay-back period. Use Form 5-B for your calculations.

After-tax pay-back period: _______________

3. [1 points] Enterprise is also considering an alternative product line that has the following characteristics:

NPV = $ 10,000

After-tax payback period = 3 years.

Which project would you recommend? Briefly explain your answer.