Question
Firm ABC is considering a project that requires the purchase of new production line equipment. The firm requires a minimum return of 14% in this
Firm ABC is considering a project that requires the purchase of new production line equipment. The firm requires a minimum return of 14% in this project, due to the risks involved. The firm is on the 30% tax bracket. Sales, revenues and costs details are given in the following table:
Cost of new plant and equipment Shipping and installations costs Sales Foretasted Units
Annual total costs and expenses (except depreciation) Depreciation
Net Working Capital (inventory expenses) requirements
Additional Information | $700,000 300000 Year 1 150,000 Year 2 250,000 Year 3 350,000 Year 4 375,000 Sales Price = $10/unit 500000
150,000 per year
50,000 every year, including year zero.
Management believes the equipment, left over inventory , and other assets can be sold for a net value of $300,000 on year 4 |
Calculate the Cash Flows for all years of operation, including year zero. For years 0 through 5.
- Using the NPV and IRR decision methods, decide if the firm should take the project.
NPV =
IRR =
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