Question: King Arthur, Inc. has assembled the estimates shown below relating to a proposed new project. These estimates are based on a 5 year project life,

King Arthur, Inc. has assembled the estimates shown below relating to a proposed new project. These estimates are based on a 5 year project life, at the end of which the new equipment would be sold, working capital would revert to other uses in the company, and the product would be discontinued. King Arthur uses a discount rate of 10%.

Annual cash sales $450,000

Annual out of pocket cash expenses $340,000

Annual depreciation on new equipment $ 50,000

Initial cost of new equipment $300,000

Salvage value of equipment in 5 years $ 50,000

Working capital requirement $ 60,000

Required:

1. Use the tables (Exhibit 13B-1 and 13B-2) to calculate the net present value of this project.

2. Should the company invest in this equipment? Why?

3. What statement can be made about the internal rate of return for this purchase?

(write the steps)

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