ICU SHADES, INC. ICU Shades is a publicly traded company that is a major manufacturer of glasses frames in the United States. They currently produce 10 top selling glasses frames, however the company has recently lost market share. The company has a new frame design that is considering bringing to market to regain lost market share. The company has spent $2.5 million on the research and development of the new frame.

Operations: Because the new frames will be made of an organic plastic, the company will need entirely new machinery for the production of the frames. The equipment will cost $29 million and be depreciated on a 20- year MACRS schedule. Because of the increased sales in Year 3, the company will also require an additional $17 million in equipment 2 years from today. All equipment will be worthless at the end of the project. The company expects to sell 225,000, 320,000, 540,000, 560,000 and 580,000 frames per year over the next five years, respectively. The new frame will have a wholesale price of $115 per frame. Variable production costs are expected to be 39 percent of sales. Fixed costs will be $9.2 million per year. The company will also require an investment of inventory equal to 12 percent of sales at the time of the sales. The company feels that it will lose sales of 20,000, 35,000, 40,000, 40,000, and 40,000 of its existing frames each year for the next five years, respectively. The existing frames have a price of $94, variable costs of 30 percent of sales, and fixed costs of $8.7 million per year. The 12 percent inventory requirement also applies to the existing frames.

Other Issues: Based on prior experience, the company does not feel that sales will end in five years, however, newer glasses frames will enter the market and reduce the sales of ICU's new model. Consequently, total cash flows after Year 5 are expected to decrease at a rate of 5 percent per year for the following 15 years, when the frames will be discontinued. The tax rate is 21 percent and the company requires a 14 percent rate of return. The company's optimal capital structure is 30 percent debt and 70 percent equity. Floatation costs are 3 percent for debt and 6 percent for equity. The equity portion of the new investment will come entirely from retained earnings. Floatation costs are required for fixed assets; they are not required for NWC.

Analysis: Calculate the NPV and IRR for the project. Can you use each of these in this analysis? Should the company undertake the project?