The American Aluminum Company is considering making a major investment of $150 million ($5 million for land, $45 million for buildings, and $100 million for manufacturing equipment and facilities) to develop a stronger, lighter material called aluminum lithium that will make aircraft sturdier and more fuel-efficient. Aluminum lithium, which has been sold commercially for only a few years as an alternative to composite materials, will likely be the material of choice for the next generation of commercial and military aircraft because it is so much lighter than conventional aluminum alloys, which use a combination of copper, nickel, and magnesium to harden aluminum. Another advantage of aluminum lithium is that it is cheaper than composites. The firm predicts that aluminum lithium will account for about 5% of the structural weight of the average commercial aircraft within five years and 10% within 10 years. The proposed plant, which has an estimated service life of 12 years, would have a capacity of about 10 million pounds of aluminum lithium, although domestic consumption of the material is expected to be only 3 million pounds during the first four years, 5 million for the next three years, and 8 million for the remaining life of the plant. Aluminum lithium costs $12 a pound to produce, and the firm would expect to sell it at $17 a pound. The buildings will be depreciated according to the 39-year MACRS real property class, with the buildings placed in service on July 1 of the first year. All manufacturing equipment and facilities will be classified as seven-year MACRS properties. At the end of the project life, the land will be worth $8 million, the buildings $30 million, and the equipment $10 million. Assuming that the firm's marginal tax rate is 40% and its capital gains tax rate is 35%, determine the following:
(a) The net after-tax cash flows.
(b) The IRR for this investment.
(c) Whether the project is acceptable if the firm's MARR is 15%.