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Ray's Racks, a company that develops and manufactures bike racks and locks, has developed a new, highly simplified bike lock. It can go into production
Ray's Racks, a company that develops and manufactures bike racks and locks, has developed a new, highly simplified bike lock. It can go into production for an initial investment in equipment of $5.7 million. The equipment will be depreciated straight line over 6 years to a value of zero, but in fact it can be sold after 6 years for $671,000. The firm estimates production costs of $1.80 per lock and believes that the locks can be sold for $8 each. The firm believes that working capital (primarily for spare parts) must be maintained at a level of 10% of next year's forecast sales. The project will come to an end in 6 years, when the lock becomes technologically obsolete. The firm's tax bracket is 35%. This project is considered to be an average risk project for Ray's Racks. Sales volume forecasts (number of locks sold) are given in the foilowing table. 0 1 2 0 400,000 500,000 700,000 700,000 500,000 300,000 3 4 5 6 Thereafter Year Sales (locks) 0 1. 2. 3. 4. 5. 6. What are annual operating and total cash flows (show in CF model below)? Assuming a discount rate of 18% what is the project PV? What is the project NPV? Based on the NPV rule, should the project be accepted? What is the project IRR? Based on the IRR rule, should the project be accepted
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