Thompson and Company plans to invest $8 million in a new product line. It expects the product

Question:

Thompson and Company plans to invest $8 million in a new product line. It expects the product to sell for $20 per unit. Variable costs are $8 per unit, and annual fixed operating costs (excluding depreciation) are $750,000. The firm expects sales to begin at 200,000 units and grow by 10% a year for four years, leveling off thereafter. Sales will decrease by 25% a year starting in year 8. Thompson expects to close the plant and discontinue the product line at the end of year 10, realizing zero . The required rate of return on the investment is 12%, and the company uses straight-line depreciation for tax purposes. The corporate tax rate is 30%.

Required:
a. Calculate the annual net after-tax cash flows for each of the 10 years of the proposed product line.
b. What is the of the project?
c. What is the IRR for this project?

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