The Quality Castings Company is considering adding a new line to its product mix. The production line would be set up in unused space in the company's main plant. The firm had spent $100,000 over the past two years to rehabilitate the production line site.
The machinery's invoice price is approximately $340,000. The machinery has an economic life of 4 years but is placed in the MACRS 5-year class. It is expected to have a salvage value of $38,000 after 4 years of use.
The new line would generate sales of 250 units per month for 4 years. Production costs per unit are $100 in the first year. Each unit can be sold for $200 in the first year. The sale price is expected to increase by 3 percent per year; however, costs are expected to increase by 5 percent annually. Further, the new line will require annual investment in net working capital, equal to 12 percent of the next year's sales revenue. The new product line is expected to decrease sales of the firm's other lines by $50,000 per year. The firm's tax rate is 35 percent. Round all entries to the nearest dollar. What are the NPV and IRR of the project if the firm's opportunity cost of capital is 9 percent?