Firm XYZ is the leading snow producer in the USA. The company hired a consultant to perform a study that cost $10,000. The new equipment costs $900,000 and will require shipping costs of $25,000. Firm XYZ has estimated that the additional snow production will decrease environmental costs by $250,000 per year. The equipment belongs to a CCA class of 25%. It is estimated to have a useful life of 9 years after which it can be salvaged for $120,000. If the new equipment is purchased, the company will require an increase of $15,000 in inventory. Also, accounts payable will have to increase by $4,000. All working capital elements will be recovered fully at the end of the useful life. The company has to borrow an additional $80,000 at 10% interest rate from the bank. Assuming the company has a cost of capital of 12% and a tax rate of 40%.
a) Based on the NPV analysis, should Firm XYZ purchase this new equipment? Show your work
b) What can you say about the IRR of the project?