Question: Your firm is considering a three-year project that will save the firm $40,000 per year in labor costs. The equipment to undertake this project will

Your firm is considering a three-year project that will save the firm $40,000 per year in labor costs. The equipment to undertake this project will cost $100,000, will last three years and will be subject to special MACRS depreciation with MACRS rates of 25%, 50% and 25% in years 1-3 respectively. At the end of the project, you believe that you will be able to sell the equipment for $10,000. This project will allow the firm to reduce supplies inventory by $25,000 during the life of the project. The firm has a required rate of return of 10% on projects of this risk class. The firm's tax rate is 20%. Compute the NPV of the project at the required rate of return, the IRR of the project and the NPV of the project at the Exact IRR rate you determined.

Should the firm accept this project? What is the highest discount rate at which this project should be accepted?

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Answer To evaluate whether the firm should accept the project well calculate the Net Present Value NPV and Internal Rate of Return IRR of the project ... View full answer

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