Read Book Company is the manufacturer of exercise machines and is considering producing a new line of equipment in an effort to increase its market share. The new production line will cost $850,000 for manufacturing the parts and an additional $280,000 is needed for installation. The equipment falls into the MACRS 3yr class, and would be sold after four years for $350,000. The equipment line will generate additional annual revenues of $600,000, and will have

additional annual operating expenses of $300,000. An inventory investment of $75,000 is required during the life of the project. Read Book Company is in the 25 percent tax bracket, and its existing cost of capital is 8 percent.

Initial outlay = -$1,130,000

Annual cash flow = Year 1 = 319,157 year 2 = 350,571 year 3 = 266,838 year 4 = 245,933

Terminal non operating cash flow = $337,500

NPV = $31,739.98

a. What is the estimated Internal Rate of Return (IRR) of the equipment?

b. Should the equipment be accepted based on the IRR criterion?

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