Question
Ernie Enterprises is evaluating a three year project. The up front investment in equipment is $2.25 million. The equipment will be depreciated to zero over
Ernie Enterprises is evaluating a three year project. The up front investment in equipment is $2.25 million. The equipment will be depreciated to zero over the life of the project but the company expects to be able to sell the equipment for $225,000 at the end of the project. The company will also need to invest $200,000 up front for working capital. The project is expected to generate annual sales of $1.7 million. Cash operating costs will be $650,000 per year. The company's required rate of return is 12% and its tax rate is 21%
a. Calculate Operating Cash Flow for each year (0, 1, 2 and 3)
b. What is the project's NPV and its IRR?
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