Fritters Fries has a large production facility which produces french fries for many restaurants. They are considering upgrading a large portion of their manufacturing equipment. The new equipment will cost $3,500,000 and an additional $45,000 of installation costs will be required. The equipment will be at end of life in five years at which time they expect they will be able to resell it for $1,000,000.

As a result of this new more efficient equipment they expect production to increase from 200,000 units to 255,000 units per year until the equipment is retired. Currently they can sell the product for $20 per unit and they expect that price to remain the same. As well with the increased production level they will require increased inventory at a cost of $80,000 and accounts receivable will also increase by $55,000. Fritters Fries also plans to make a change in its supplier payment shifting from net 20 to 30 day payments resulting in an increase in accounts payable of $40,000. The CCA rate for this new equipment is 30%.

The company's tax rate is 40% and the company requires a rate of return of 9% on all capital expenditure projects.

Based on an NPV analysis should the project be accepted or rejected? Show your work

Answer rating: 100% (QA)

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