In: Finance
Read Book Company is the manufacturer of exercise machines and is considering producing a new line of equipment in an effort to increase its market share. The new production line will cost $850,000 for manufacturing the parts and an additional $280,000 is needed for installation.
The equipment falls into the MACRS 3‐yr class, and would be sold after four years for $350,000. The equipment line will generate additional annual revenues of $600,000, and will have Additional annual operating expenses of $300,000. An inventory investment of $75,000 is required during the life of the project. Read Book Company is in the 25 percent tax bracket, and its existing cost of capital is 8 percent.
a. Calculate the initial outlay of the project
b. Calculate the annual after‐tax operating cash flow for Years 1 ‐4.
c. Determine the terminal year non‐operating cash flow in year 4:
d. What is the equipment NPV?
e. What is the estimated Internal Rate of Return (IRR) of the equipment?
f. Should the equipment be accepted based on the IRR criterion?