XYZ Co. is operating at full capacity. It can only meet the increased demand for its product by investing in new plant and equipment. It is considering a proposal for an investment of $4.0 million in fixed assets, which would allow the firm to increase its annual production by 200,000 units. The estimated sale price of the each unit is $25, and the variable cost of each additional unit is $15. Insurance, maintenance, license fees and other fixed costs associated with the new assets would amount to $100,000 per year. The assets' useful life is estimated at four (4) years, and their residual value at the end of four years is antipated to be at least $400,000. In addition to the investment in fixed assets, the increase in sales would require additional working capital in the form of inventory and accounts receivable, partially funded by higher accounts payable. This investment in working capital is estimated at $500,000. For tax purposes, the new assets fall into the three-year MACRS asset class. The company's tax rate is 30%. The company's cost of funds is 12%. Required: Using the templates empoyed in class, compute the net present value of this proposed investment. (See the illustration presented in class about the proposed factory in Ohio and the Solutions to Chapter 10 Problem nos. 13 & 19 if you are in doubt about the templates to use.) Modified Accelerated Cost Recover System (MACRS) Depreciation Rates Applicable to Asset Classes ! 3 Recovery Year Fifteen- Three-Year Five-Year Seven-Year Ten-Year Year Asset Class Asset Class Asset Class Asset Class Asset Class 1 2 3 0.3333 0.4445 0.1481 0.0741 0.2000 0.3200 0.1920 0.1152 0.1152 0.0576 4 0.1429 0.2449 0.1749 0.1249 0.0893 0.0892 0.0893 0.0446 ! S 5 6 7 8 0.1000 0.1800 0.1440 0.1152 0.0922 0.0737 0.0655 0.0655 0.0656 0.0655 0.0328 0.0500 0.0950 0.0855 0.0770 0.0693 0.0623 0.0590 0.0590 0.0591 0.0590 0.0591 0.0590 0.0591 0.0590 0.0591 0.0295 9 10 11 12 13 14 15 16