The production line would be set up in unused space in Shrieves main plant. However, last year the firm spent $100,000 to rehabilitate the production line site.This space could be leased out to another firm at $25,000 per year. The machinerys invoice price would be approximately $200,000, another $10,000 in shipping charges would be required, and it would cost an additional $30,000 to install the equipment. The machinery has an economic life of 5 years and will be depreciated to zero on a straight line basis over 5 years. It is expected to have a salvage value of $25,000 after 4 years of use.

The new line would generate incremental sales of 1,250 units per year for 4 years at an incremental cost of $100 per unit in the first year, excluding depreciation. Each unit can be sold for $200 in the first year. However, the new product line is expected to decrease sales of the firms other lines by $50,000 per year. The cost accountants have determined that $.50 overhead will be charged for each unit of sales, this cost is based on the existing total overhead cost. To handle the new line, the firms net working capital would have to immediately increase by an amount equal to 12% of gross sales revenues of the new line in the first year. The net working capital will be recovered at the end of the project.

The firms tax rate is 40%, and its opportunity cost of capital is 10%.

1. Find the projects NPV, IRR, payback.
2. What do you recommend?