XYZ Corporation is considering buying a new machine for $$40,000.$ The machine will be good for $4$ years and will allow the company to process and sell an additional $70,000$ units per year at $$2$ per unit. Variable costs will be $$1\mathrm{.}50$ per unit. Fixed costs will be $$11,000$ per year. This project will require an upfront investment in inventory of $$10,000$ that will be reclaimed at the end of the project. Depreciation will be straight line with no salvage. The tax rate is $31\%$ and the required return is $22\%.$ Assume the information given is the same for all $4$ years.

Sales $(70,000$ units at $$2\mathrm{.}00/$unit$)$

$$140,000$

Variable Costs $($$$1\mathrm{.}50/$unit$)$

$105,000$

Gross profit

$$35,000$

Fixed costs

$11,000$

Depreciation $($$$40,000/4)$

$10,000$

EBIT

$$14,000$

Taxes $(34\%)$

$4,340$

Net Income

$$9,660$

Year

$0$

$1$

$2$

$3$

$4$

NWC

$$10,000$

$$10,000$ $$10,000$ $$10,000$ $$10,000$

Net Fixed Assets

 $40,000$

$30,00020,00010,0000$

Total $$’$s Invested

$$50,000$ $$40,000$ $$30,000$ $$30,000$ $$10,000$

Using the above information calculate the CFFA per year, the NPV and the IRR. Using this, determine whether then project should be accepted or rejected.

NPV $=$ $$3,583\mathrm{.}96$ and IRR $=26\%$; Accept the project.

NPV $=($$$975\mathrm{.}03)$ and IRR $=21\%$; Reject the project.

NPV $=$ $$9,024\mathrm{.}97$ and IRR $=34\%$; Accept the project.

NPV $=$ $$13,583\mathrm{.}96$ and IRR $=38\%$; Accept the project.