Joe Brown and Fred Anthony are planning to invest in a Go Green project. The marginal tax rate is 26% and the company tax rate is 30%. Due to their lack of finance expertise, they have asked your assistance in determining whether they should invest in Go Green or not.
- They have provided you with the following information:
- The project has a life of 6 years.
- The equipment costs $280000 with an additional installation cost of $25000.
- The equipment will be sold at the end of project life for $55,000
- Straight line method is used in calculating depreciation.
- The Fiji Tax Authority has given this type of equipment an effective life of 5 years.
- Sales for the first year will be $85000 and sales are expected to grow at 7% pa for each year of the project.
- Cost of goods sold is 18 percent of sales every year
- Working capital will be 7% of sales revenues for each year. The working capital investment has to be made at the start of each period. All working capital will be recovered.
- Marketing costs will be 2% of sales per annum.
- The hurdle rate is 10%.
Required:
a. Calculate NPV for Go Green project. (10 marks)
b. Calculate IRR for Go Green project usin