What is the project

Question

FITCO Inc. is a Pharmaceutical Company which is considering investing in a new equipment for the production of pain-reliever medicine for individuals who suffer from cardio vascular diseases. The new equipment will costs $2,000,000, and an additional $100,000 is needed for installation. The equipment which falls into the MACRS 5-yr class, would be sold after five years for $150,000.

The equipment will generate additional annual revenues of $965,000, and will have annual operating expenses of $300,000. An inventory investment of $60,000 is required during the life of the project. FITCO is in the 30 percent tax bracket, and has the same risk as the firm's existing assets. Its existing cost of capital is 15 percent.

a) Calculate the initial outlay of the project.

b) Calculate the annual after-tax operating cash flow for Years 1 -5.

c) Determine the terminal year non-operating cash flow in year 5.

d) What is the project NPV?

e) What is the estimated Internal Rate of Return (IRR) of the project?

f) Should the project be accepted based on the IRR criterion?

Answer 1

Please review the case situation illustrated and on the basis of the information and facts provided, responds to the following questions. Question: FITCO Inc. is the Pharmaceutical Company that is considering investing in new equipment for the production of pain-reliever medicine for individuals who undergo from cardio vascular diseases. The latest equipment will cost $2,000,000, and an extra $100,000 is required for installation. The equipment that falls to the MACRS 5-yr class would be sold after 5 years for $150,000. 1) Compute the initial outlay of the project. 2) Compute the yearly after-tax operating cash flow for Years 1 to 5. 3) Find out the terminal year non-operating cash flow in year 5. 4) Determine the project NPV? 5) Determine the estimated Internal Rate of Return (IRR) of the project? 6) Must the project be accepted based on IRR principle?