A project Manager is evaluating whether it is economical to develop a project requiring expenditures at time 0 of $200,000 for land, $50,000 for product inventory working capital, $580,000 for a business building, $440,000 for equipment and $75,000 for vehicles. The working capital investment is based in 5,00 units being produced in time zero at a cost of $10.00 per unit with no units sold at that time time. Starting in year 1 the manager estimates that production will ramp up to 23,000 untis before full prodcution of 25,000 untis per year is realized in years 2, 3 and 4. The year 1 procudt selling price is targeted at $25.00 per unit with this amount escalating 10% per year therafter . Sales in years 1 through 4 are estimated to be uniform at 25,000 units per year. Year 1 production costs per units are expected to be $11.00 . In the following years, it is estimated that operating costs per unit prodcued will escalate at 10% per year beginning in year 2. The company uses the annualized FIFO accounting methodology to value inventory. At the end of year 4, it is expected that the business (including all assets and working capital product inventory of 3,000 units) can be sold for an escalated terminal value of $ 2,000,000. Use a straight-line depreciaation over the 39 years for the building cost starting in year 1, assuming 7 months of service in year 1. Use MACRS depreciation for a 7-year life for the equipment cost starting in year 1 with the hal-year convention. Similarly, for the vehicle cost start depreciation in year 1 using the MACRS rates based in the half year convention as well. assume any gain from sale of this business ate the end of year 4 is taxed as ordinary income. write-off the remaining tax book values ate the end of year 4.
Assuming a 40% effective federal and state income tax rate, determine project after-tax cash flows for time zero and years 1 thru 4 (including the sale of the business at the end of year 4) and calcualted the DCFROR, NPV and PVR for the project. The investor has and escaleted dollar min-ROR of 15%. From and economic perspective, should this project be accepted?