Question 3

GHI Inc. plans to introduce a new machinery with an estimated project life of 5 years. The project will require an initial investment of $700,000, with an additional investment of $200,000 at the end of the second year. Annual sales revenue is projected at $400,000, with operating expenses amounting to 40% of sales revenue. The machinery will have a salvage value of $50,000 at the end of its useful life. The firm has a tax rate of 30% and considers an after-tax cost of capital of 9%.

Requirements:

1. Calculate the NPV of the project.
2. Determine the IRR of the project.
3. Calculate the payback period.
4. Assess the impact of a reduction in sales revenue by 10% on the NPV.
5. Advise whether to proceed with the investment based on financial metrics.