John James Rolly is the CFO of SD Yachts Inc., a manufacturer of boat fenders for luxury yachts. Rolly is considering the purchase of a 2 to injection mold, which will allow the company to mold boat fenders. The equipment cost $250,000. The project is expected to produce after tax cash flows of $60,000 for the first year, and increase by $10,000 annually; the after-tax cash flow in year 5 will reach $100,000. Liquidation of the equipment will net the company $10,000 in cash at the end of 5 years.
a) Assume that the required return is 15%. Is the project profitable?
b) Assume that the required return is 19%. Is the project profitable?
c) What is the IRR of the project?
d) How will your answer change to part (a) if the company does not net anything on the liquidation of the equipment?