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Sierra Corp, is planning to expand its production of molded plastic toys. The expansion will require the purchase of two new machines: Machine A (that
Sierra Corp, is planning to expand its production of molded plastic toys. The expansion will require the purchase of two new machines: Machine A (that heats and liquefies powered plastic) at a cost of $65,000, and Machine B (that molds the liquid plastic into various forms) at a cost of $75,000. Miscellaneous delivery and set-up costs to be incurred are estimated to be $10,000. The two new machines will also allow Sierra to retire an old piece of equipment that has been fully depreciated and can be sold for $12,000. In addition, as part of the start-up, raw material inventory will need to be increased by $10,000 (at time 0). Both pieces of machinery are classified as 5-year MACRS assets and will be depreciated as such. As a result of the new production, sales of new toys are expected to increase by $250,000 in year 1 and to increase from this level by 5% per year over the 6-year life of the project. Operating expenses (excluding depreciation) are expected to increase by S165,000 in year 1 and increase by 3% per year thereafter. At the end of six years, the total salvage value of the 2 machines will be $5,000 Sierra's cost of capital is 16,5% and faces a marginal tax rate of 40% Calculate the IRR and NPV of this project and determine if Sierra should undertake it
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