Question: A product line can sell 80,000 products per year for 4 years (after which time this project is expected to shut down). The product will for $5 each with variable costs of $3 for each one produced, while annual fixed costs associated with the production will be $70,000 In addition, there will be a $250,000 initial expenditure associated with the purchase of new production equipment. It assumed that this initial expenditure will be depreciated using the SL method down to zero over 4 years. This project will also require a one-time initial investment of $30,000 in net working capital associated with inventory. The required rate of return is 10% Tax rate is 40%. What are the NPV and IRR? Do you accept the project? Firm ABC is considering investing in a project to reduced cost by $60,000 annually. The equipment costs $20,000, had a 4-year life (will be depreciated as a 3-year MACRS asset: 33% for the first year, 45% for the second year, and 15% for the third year), requires no additional investment in net working capital, and has a salvage value of $40,000. The required rate of return is 10%. Tax rate is 34%. For #3 & #4 below:
What is the FCF each year?
What are the NPV and IRR? Do you accept the project? why?