Henderson Company has an opportunity to manufacture and sell a new product for a five-year period. The company estimated the following costs and revenues for the new product:

Cost of new equipment $ 420,000

Initial working capital required $ 105,000

Overhaul of the equipment after three years $ 50,000

Salvage value of the equipment after five years $ 30,000

Annual revenues and costs: Sales $ 850,000

Variable expenses $ 500,000

Fixed out-of-pocket operating costs $ 197,000

When the project concludes in five years the working capital will be released for investment elsewhere in the company.

3. In the Excel template, using Goal Seek, calculate this investments internal rate of return. If the companys hurdle rate is 18% would it be likely to accept or reject the investment? Why?

4. What is the projects net present value when using a discount rate of 18%?

5. If the company wants to achieve an 18% return on this investment, what is the maximum amount that it can spend each year on fixed out-of-pocket operating costs? Use Goal Seek to compute your answer. Note: The fixed out-of-pocket operating costs remain constant for all five years, therefore modifying cell C13 automatically updates cells D13 through G13.

6. If the investment in working capital increased from $105,000 to $125,000 would you expect the internal rate of return to increase, decrease, or stay the same? No computations are necessary to answer this question.

7. Refer to the original data. Using Goal Seek, calculate the internal rate of return if the investment in working capital increases from $105,000 to $125,000. Note: Be sure to return the fixed out-of-pocket operating costs to the original value of $(197,000).