Steele Electronics is considering investing in a new component that
Steele Electronics is considering investing in a new component that requires a $ 100,000 investment in new capital equipment, as well as additional net working capital. The investment is expected to provide cash flows over the next five years. The anticipated earnings and project free cash flows for the investment are found in the table below.
a. Assuming a project cost of capital of 11.24%, calculate the project’s NPV and IRR.
b. Steele is considering the adoption of economic profit as a performance evaluation tool. Calculate the project’s annual economic profit using the invested capital figures found in the table. How are your economic profit estimates related to the project’s NPV?
c. How would your assessment of the project’s worth be affected if the economic profits in 2016 and 2017 were both negative? (No calculations required.)
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