Question: A new project will require equipment worth $100,000. The installation expenses are $10,000. The project will run for five years. The depreciation is a straight-line

A new project will require equipment worth $100,000. The installation expenses are $10,000. The project will run for five years. The depreciation is a straight-line basis. The equipment will be depreciated to a zero book value at the end of the project. The project will require an initial investment in net working capital is $5,000 which will be recouped at the end of the project. The annual operating cash flow is $50,000. The equipment is expected to have a salvage value of $4,000 at the end of the project. Assume a tax rate of 25% and the cost of capital is 10%. What are the NPV and IRR of the project? Should the equipment be purchased?

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