Question
Your firm is considering a new product development. An outlay of $110,000 is required for equipment, and additional net working capital of $5000 is required.
Your firm is considering a new product development. An outlay of $110,000 is required for equipment, and additional net working capital of $5000 is required. Implementing the project will generate a time zero investment tax credit benefit of $3,000 for the firm (i.e. at the beginning of the project). The project is expected to have a 4 year life, and the equipment will be depreciated on a straight line basis to a $10,000 book value. Producing the new product will reduce current manufacturing expenses by $20,000 annually and increase earnings (revenue) before depreciation and taxes by $23,000 annually. Stanton's marginal tax rate is 40 percent. Stanton expects the equipment will have a market salvage value of $15,000 at the end of 4 years.
1. If the cost of capital for a project of this risk is 9%, what is the projects NPV? Should it be accepted? Accept or reject the project? Why?
2. What is the projects IRR? Accept or reject the project? Why?
3. What is the projects PI? Accept or reject the project? Why?
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