Question 1: 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 $800,000 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%. Year 1 2 Unit Sales 3000 5000 6000 6,500 3 4 5 6000 6 5000 7 4000 8 3000 Based on the above information: 1) Assuming that the asset class is closed calculate: a) NPV b) IRR c) Should Evergreen company proceed with the project? 2) Assuming that the asset class will remain open calculate: a) NPV b) IRR c) Should Evergreen company proceed with the project? Question 1: 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 $800,000 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%. Year 1 2 Unit Sales 3000 5000 6000 6,500 3 4 5 6000 6 5000 7 4000 8 3000 Based on the above information: 1) Assuming that the asset class is closed calculate: a) NPV b) IRR c) Should Evergreen company proceed with the project? 2) Assuming that the asset class will remain open calculate: a) NPV b) IRR c) Should Evergreen company proceed with the project
