Problem:
Jack Inc. is interested in developing a new toy. The toys will sell for $25 each and they plan to sell 10 million toys at the end of each year for 4 years. Variable costs are $20 per toy; fixed costs are $10,000,000 per year. The interest expense is $3,000,000 per year. The project requires an additional machine that costs $120,000,000 to be depreciated on a straight line basis to a zero book value over 4 years. The machine has a salvage value of $20,000,000. The tax rate is 40%. The initial investment in net working capital is $5,000,000. No additional net working capital is needed for the project and no net working capital will be returned. The variable and fixed costs do not include the depreciation and the interest expenses. There is no horizon value.
1) If the cost of capital is 8%, find the net present value.
2) Find the internal rate of return.
3) Do you accept the project? Explain.
Note- interest is compounded annually and payments occur at the end of the period.