A construction company is considering an expansion project. So far, they have spent $75,000 investigating the viability of the project and have decided to proceed. The proposed project will cost approximately $450,000 in addition to the $75,000 that was spent on the feasibility study. The project will be depreciated over a three year MACRS class life. The construction company would use the 3-year MACRS method to depreciate the machine and equipment which are 33%, 45%, 15% and 7%. If the project is undertaken the company will need to increase its inventories by $50,000, and its accounts payable will rise by $10,000. The company will realize an additional $600,000 in sales over each of the next three years. The company’s operating costs (not including depreciation) will increase by $400,000 a year. The company’s tax rate is 40%. At t = 3, the project’s economic life is complete, but it will have a salvage value (before-tax) of $50,000 after three years. The project’s WACC is 9.5%. What is the project’s net present value (NPV)? What is the IRR? Should the project be accepted? Why or why not?
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