Question 7

STU Inc. plans to invest in new technology with a project life of 7 years. The initial investment is $1 million, and the technology will generate additional revenue of $300,000 per year. Operating costs will be $100,000 annually. The technology will have a residual value of $100,000 at the end of its life. The corporate tax rate is 26%, and the company uses a discount rate of 12%.

Requirements:

1. Compute the NPV of the project.
2. Determine the IRR.
3. Calculate the discounted payback period.
4. Assess the effect of a 15% increase in operating costs on the NPV.
5. Recommend whether the investment is justified.