Exercise 6 The Elonton Company is considering the introduction of a new product. It would have a five-year life, and sales and earnings before interest and taxes (EBIT) are expected to be as follows: End of Year Net Sales EBIT $2.0 million 3.0 million 7.0 million 7.0 million 2.0 million $150,000 300,000 700,000 700,000 250,000 The level of (net) working capital would change as follows because of the new product: increase by $100.000 at time zero, incrense by another $200,000 at the end of year one, increase by another $500,000 at the end of year 2, no further change until the end of year 4 when there is a decrease of $100,000, and the balance is freed up at the end of year 5. Equipment costing $1.3 million would be required. It would be depreciated on a straight-line basis over a five-year life to szero salvage value. Finally, the firm's marginal tax rate is 30 percent, and the required rate for this investment is 15 percent. (You may ignore the investment tax credit.) yan 286 CAPITAL BUDGETING EXERCISES Required: Using the NPV method, recommend whether the new product should be introduced. (Hint: Keep in mind that depreciation expense is deducted from revenues in deriving EBIT. In other words, depreciation on the $1.3 million of equipment was deducted from the revenue estimates to derive the EBIT estimates.) In addition calculate and interpret the IRR and MIRR