Problem:
A company is considering a project with a 6-year economic life. The project is expected to cost $200,000 and have a salvage value of $30,000. 5 year MACRS depreciation will be used. The company has a 10% cost of capital and a marginal tax rate of 35%. Careful analysis reveals that the company should expect to sell 100,000 toys during the first year of operations at $5.00 per unit. The first year COGS is expected to be $3.75 per toy. It is expected that inflation will cause revenues to increase by 3.5% per year and the COGS to increase by 3.25% per year for the projects life. Increased demand is expected to increase the quantity produced and sold by 3% per year. The project will require a $25,000 increase in working capital at the beginning of the project.
a. Calculate the NPV, IRR, MIRR, and profitability index for this project.
b. If the cost of capital was to increase to 11%, recomputed the NPV, MIRRR, and profitability index for the project.