Firm ABC is considering a project that requires the purchase of new production line equipment. The firm
Question:
Firm ABC is considering a project that requires the purchase of new production line equipment. The firm requires a minimum return of 14% in this project, due to the risks involved. The firm is on the 30% tax bracket. Sales, revenues and costs details are given in the table below:
Cost of new plant and equipment $700,000
Shipping and installations costs $300,000
Sales Foretasted (USD)
Year 1 $850,000
Year 2 $850,000
Year 3 $950,000
Year 4 $975,000
Annual total costs and expenses (except depreciation) $550,000
Depreciation $200,000 per year
Net Working Capital (inventory expenses) requirements 50,000 every year, including year zero.
Additional Information Management believes the equipment, left over inventory , and other assets can be sold for a net value of $300,000 on year 4
a. Calculate the Cash Flows for all years of operation, including year “zero”.
b. Using the NPV and IRR decision methods, decide if the firm should take the project.