Question

The managers of Classic Autos Incorporated plan to manufacture classic Thunderbirds​ (1957 replicas). The necessary foundry equipment will cost a total of ​$4,200,000 and will be depreciated using a​ five-year MACRS​ life, LOADING... . The sales manager has an estimate for the sale of the classic Thunderbirds.

The annual sales volume will be as​ follows:

Year​ one:  240

Year​ two:  270

Year​ three:  340

Year​ four:  360

Year​ five:  320

If the sales price is ​$28,000 per​ car, variable costs are ​$18,000 per​ car, and fixed costs are ​$1,200,000 ​annually, what is the annual operating cash flow if the tax rate is 30​%? The equipment is sold for salvage for ​$500,000 at the end of year five. Net working capital increases by ​$600,000 at the beginning of the project​ (year 0) and is reduced back to its original level in the final year. Find the internal rate of return for the project using the incremental cash flows.

Answer 1