Payback, NPV, and IRR (20 points total)

The Weir

Payback, NPV, and IRR (20 points total) The Weir Exploration Company is considering investing in a project at a cost of $1,000,000. The plant is expected to increase revenues but will incur additional production costs. It is estimated the Company will sell an additional 8,000 units per year under the project . The forecasted selling price and costs for the project are as follows: Selling price per unit Variable cost per unit Fixed costs per year $60.00 $5.00 $30,000 It is believed the project will have a useful life of 8 years. It is also expected that the project will require a $200,000 cash outflow at the end of the project to reclaim the property at the end of its 8-year life. The Company will depreciate this asset under the MACRS method to a salvage value of $0 for income tax purposes. The asset qualifies as a seven-year asset with the following percentages Year 1 2 3 4 5 6 % 14.29% 24.49% 17.49% 12.49% 8.93% 8.92% 8.93% 4.46% 8 The Company has an income tax rate of 21 percent and a hurdle rate of 20 percent on these type of projects Required: 1. Calculate the relevant cash flows for this investment. 2. Calculate the undiscounted payback for this project, 3. Calculate the NPV of this project. 4. Calculate the IRR of this project 5. Should Weir purchase the machine (explain)? 6. How would your analysis change if Weir determined that this project was an above average risk project? 7. At what selling price per unit will the NPV = $0