Evergreen company is investigating the feasibility of buying a new production line producing a new product. They project unit sales as in the below table, and they project price per unit to be $120 per unit at the beginning. And when competition catches up after 3 years (in the 4th year), they anticipate that the price would drop to $110.

This project requires $20,000 in net working capital at the beginning. Subsequently, total net working capital at the end of each year would be about 15% of total sales for that year. The variable cost per unit is $60, and total fixed costs are $25,000 per year.

It costs about $900,000 to buy the equipment necessary to begin production. This investment is primarily in industrial equipment and falls in Class 8 with a CCA rate of 20%. The equipment will actually be worth about $150,000 in eight years. The relevant tax rate is 40%, and the required return is 15%.

Years Unit Sales

1 3000

2 5000

3 6000

4 6,500

5 6000

6 5000

7 4000

8 3000

Based on the above information and assuming that the asset class is CLOSED calculate the NPV.

. Single line text.

(18 Points)

2.

Calculate the IRR (assuming the asset class is CLOSED)

. Single line text.

(5 Points)

3.

Based on your above answers, should the company proceed with the project? Explain

. Single choice.

(2 Points)

Yes

No

Indifferent

4.

Assume that the asset class will remain OPEN, calculate the NPV

. Single line text.

(18 Points)

5.

Calculate the IRR (assuming that the asset class remain OPEN)

. Single line text.

(5 Points)

6.

Based on your previous answers, should Evergreen go ahead with the project (assuming the asset class will remain open)? Explain.

. Single choice.

(2 Points)

Yes

No

Indifferent