Question

Margarite’s Enterprises is considering a new project. The project will require $200,000 for new fixed assets and $15,000 for additional investments in net working capital. The project has a 3-year life. The fixed assets will be depreciated using 3-year MACRS to a zero book value over the life of the project. At the end of the project, the fixed assets can be sold for 5 percent of their original cost. The net working capital returns to its original level at the end of the project. The project is expected to generate annual sales of 180 units and the selling price per unit is $2,000. Variable cost per unit is expected to be $900 and annual fixed costs are expected to be $10,000. The tax rate is 34 percent and the required rate of return (cost of capital) is 15 percent. (A) Calculate the project’s initial investment costs, annual operating cash flows and terminal cash flows. What are project’s NPV and IRR? (B) Should Margarite accept the project?

Answer 1