A company wants to launch a new product that will require a $250,000 initial investment, and a further $150,000 investment in year 2. Depreciation will be $50,000 a year over the project’s 5-year life and the investment will be sold for a salvage value of $40,000. The new product will generate revenue of $200,000 a year and the cost of goods sold will be 25% of revenue. An additional $10,000 in working capital will be required. The company plans to finance 20% of its capital investments with debt, the interest rate for which is 8%. (Assume the principal is repaid at the end of the project.) The firm’s cost of capital is 12% but its cost of equity is 14%. If the tax rate is 40% Calculate the NPV and IRR of this project to equity investors.

(Assume no tax on salvage value)

Answer rating: 100% (QA)

To calculate the net present value NPV and internal rate of return IRR of the project for equity investors we need to determine the cash flows associated with the project and discount them at the appr... View the full answer