Your company is considering an expansion into a new product area. The company has collected the following information about the proposed product. (Note: You may or may not need to use all of this information, use only the information that is relevant.)

• The project has an anticipated economic life of 5 years.
• The company will have to purchase a new machine to produce the product. The machine has an up-front cost (T = 0) of $750,000. The machine will be depreciated on a straight-line basis over 5 years (that is, the company's depreciation expense will be $150,000 in each of the first five years (T = 1, 2, 3, 4, and 5). The company anticipates that the machine will last for at least five years, and that after five years, its before-tax salvage value will equal $100,000.
• If the company goes ahead with the project, it will have an effect on the company's net working capital. At the outset, T = 0, inventory will increase by $50,000 and accounts payable will increase by $30,000. At T = 5, the net working capital will be recovered after the project is completed.
• The project is expected to produce EBIT of $200,000 the first year (T = 1), $300,000 the second and third years (T = 2 and 3), $200,000 the fourth year (T = 4), and $150,000 the final year (T = 5). These values already include operating costs that are expected to equal 50 percent of sales revenue and depreciation expense.
• The company's interest expense each year will be $80,000.
• Because of synergies, the new project is expected to increase the after-tax cash flows of the company's existing products by $25,000 a year (T = 1, 2, 3, 4, and 5) and this is considered to be incremental to this particular project.
• The company's overall WACC is 12 percent. However, the proposed project is less risky than the average project, leading the firm to use a WACC of 10 percent for this project.
• The company's tax rate is 40 percent.

What are the NPV and the IRR for this project?

Answer rating: 100% (QA)

To calculate the NPV Net Present Value and IRR Internal Rate of Return for the project we need to ca... View the full answer