1. Globatt, Inc., forecasts unit sales for a new dry cell battery project as follows: Year Unit...
Question:
1. Globatt, Inc., forecasts unit sales for a new dry cell battery project as follows:
Year Unit Sales
1 $82,000
2 88,000
3 96,000
4 90,000
5 74,000
Production of the batteries will require $1,400,000 in net working capital to start
and additional net working capital investments each year equal to 15 percent of
the projected sales increase for the following year. Total fixed costs are
$1,950,000 per year, variable production costs are $190 per unit, and the units are
priced at $365 each. The equipment needed to begin production has an installed
cost of $19,500,000. Because the batteries are intended for racing cars, this
equipment is considered industrial machinery and thus qualifies as seven-year
MACRS property. In five years, this equipment can be sold for about 20 percent
of its acquisition cost. The company is in the 35 percent marginal tax bracket and
has a required return on all its projects of 20 percent.
Based on these preliminary project estimates,
what is the NPV of the project?
What is the IRR?
Should the company pursue?