QUESTION 10

Lowell Inc. projects unit sales for a new project with a life of FOUR YEARS as follows:

year 1 = Unit sales 10,000

Year 2 = Unit sales 12,000

Year 3 = Unit sales 14,000

Year 4 = Unit sales 16,000

Production will require Lowell must have an amount of NOWC on hand equal to 11 percent of the upcoming years sales. Total fixed costs are $100,000 per year, variable production costs are $220 per unit, and the units are priced at $300 each. The sale price and variable costs will increase by 2 percent every year. The equipment needed to begin production has an installed cost of $2,000,000. The equipment qualifies as 5-year MACRS property.

Years 1 = 20% depreciation rate

Yyear 2 = 32 % depreciation

Year 3 = 19% depreciation

Year 4 = 12% depreciation

In FOUR years, this equipment can be sold for about 22 percent of its acquisition cost. Lowell is in the 25 percent marginal tax bracket and has a required return on all its projects of 18 percent. Based on these preliminary project estimates, what is the IRR of the project?