Your company is considering making a new investment that is estimated to cost $5.5 million at time zero. The after-tax cash flow benefits from the project are estimated to be $1.5 million per year in years 1-5. The project has a minimum required return of 12.0%.
a.) Calculate the project's NPV and IRR and indicate whether or not the project is an acceptable investment.
b.) At a later date, the company's CFO attends a follow-up meeting regarding the project, which is stalled out due to pessimism about its ability to earn an economic profit and generate a sufficiently high return on investment. The CFO mentions that the project creates a significant number of new jobs, and would therefore qualify for an investment tax credit (ITC) of $500,000. She asks you to re-run the numbers assuming that the ITC can be fully captured at time zero. Does including the value of the ITC in the project analysis make it an acceptable investment? (Answer by interpreting the change in the project's NPV and IRR.)