As a CFO of ABC Corporation, you need to analyze a proposal for establishing a

small production line of high$-$quality oil filters for general aviation aircraft.

ABC has a building that was previously used for a research lab but is now empty

because last year, the lab was relocated to Arizona. The building is suitable for the

production line. ABC does not consider selling the building, but the corporation can

lease it and collect $$40,000$ after tax annually.

The project requires an investment of $$1\mathrm{.}3$ mln in production machinery. The

corporation applies straight$-$line depreciation to the production machinery over five

years to a book salvage value of $$100,000.$ ABC anticipates that the machinery can

actually be sold in year $5$ for $$500,000.$

The revenues and operating expenses related to the production line are presented in

Table $1.$ The project will initially require $$350,000$ in working capital that will be

fully recovered in year $5.$ The working capital requirements will vary yearly $($see

Table $1).$

Last year the corporation sold some of the relocated lab equipment for $$300,000.$

ABC intends to use the proceeds for the oil filters project.

In five years, the corporation will close down the production line and concentrate on

multiple research projects for NASA.

The firm$$s marginal tax rate is $21$ percent, and the discount rate is $12$ percent.

a$.$ Calculate the NPV and IRR of the project.

b$.$ Should ABC accept or reject the project? Why yes or why not?

c$.$ Would you change your decision if the discount rate were $10\%?$ Why yes or why

not?

ear: $012345$

Capital investment $ $1,300,000\mathrm{.}00$

Salvage value $($after tax$)$

Working capital $ $350,000\mathrm{.}00$ $ $400,000\mathrm{.}00$ $ $500,000\mathrm{.}00$ $ $600,000\mathrm{.}00$ $ $500,000\mathrm{.}000$

Change in working capital

Revenues $ $620,000\mathrm{.}00$ $ $744,000\mathrm{.}00$ $ $892,800\mathrm{.}00$ $ $1,071,360\mathrm{.}00$ $ $1,285,632\mathrm{.}00$

Operating expenses $ $300,000\mathrm{.}00$ $ $360,000\mathrm{.}00$ $ $432,000\mathrm{.}00$ $ $518,400\mathrm{.}00$ $ $622,080\mathrm{.}00$

Depreciation

Pretax profit

Tax $(21\%)$

Profit after tax

Cash flows from operations

Opportunity costs

Net cash flow

NPV

IRR