Question 4

JKL Corp is considering a new project with a life span of 6 years. The initial capital expenditure required is $900,000. The project will generate sales of $500,000 annually, with variable costs making up 30% of sales and fixed costs of $100,000 per year. At the end of the project, the equipment can be sold for $80,000. The company is taxed at a rate of 25% and uses a discount rate of 11%.

Requirements:

1. Compute the NPV of the project.
2. Determine the IRR.
3. Calculate the discounted payback period.
4. Evaluate the effect of an increase in variable costs by 5% on the NPV.
5. Recommend if the project should be approved.