Sports Inc. is a Sport s Shoes Company which is considering investing in a new equipment for the production of a new line of Tennis and Football Shoes for its elite customers . The new equipment will costs $250,000, and an additional $80,000 is needed for installation. The equipment which falls into the MACRS 3 -yr class, would be sold after three years for $35,000. (Hint: Since, t his equipment will not be fully depreciated, because it is sold in year 3, you ignore the last tranche of the depreciation structure .)
The equipment will generate additio nal annual revenues of $210,000, and will have annual operating expenses of $60,000. An inventory investment of $60,000 is required during the life of the project. Sports EX is in the 30 percent tax bracket, and has the same risk as the firm’s existing a ssets. Its existing cost of capital is 15 percent.
a. Calculate the annual after -tax op erating cash flow for Years 1 - 3.
b. Determine the terminal year (in year 3) after -tax non- operating cash flow.
c. What is the project NPV?
d. What is the estimated Internal Rate of Return (IRR) of the project ?