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Clover Company plans to invest $7.85 million in a new piece of equipment that will be...

Clover Company plans to invest $7.85 million in a new piece of equipment that will be used on a major product line. The equipment is expected to last 10 years with a salvage value of zero.

The company anticipates the new equipment will be able to produce 200,000 additional units to meet the increasing demand for the product.

The product sells for $18 per unit, variable costs are $7.20 per unit and annual fixed operating costs (excluding depreciation) will be $770,000 (these amounts are all cash basis).

The company uses straight line depreciation.

The required rate of return is 12%.

  1. If NPV is used to evaluate the project, should it be considered?
  2. Should we expect the IRR for the project to be higher, lower or the same as the required rate of return? Prove your answer by calculating the IRR for the project

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ekkarill92 answered 2 years ago
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