Question

The Asian Carp Corp. (ACC) has developed a new line of spinning reel it plans to produce and sell in the United States. The cost of the necessary equipment will be $835,000 plus $37,000 for installation and delivery. The equipment falls into the MACRS 5-year class. The equipment will be scrapped in 5 years for an estimated $100,000. ACC estimates that sales in the first year of production will be $750,000, and due to intense marketing and word-of-mouth advertising, they believe sales will double in the second year. Sales are estimated to grow at 20% in the third year and 10% in the fourth year. Sales in year 5 will be the same as in year 4. Thereafter, the market will be saturated for this project and they will have to think of something new. Production costs will be $55,000 in fixed costs plus 70% of sales in variable operating costs. Net operating working capital requirements will be 4% of the increase in sales in the following year. If ACC is in the 40% tax bracket, calculate the initial cash outlay, operating cash flows in years 1 and 2, and the terminal cash flows for this project. Also calculate the project’s Net Present Value and Modified Internal Rate of Return assuming ACC has a 12% cost of capital and that operating cash flows in years 3, 4, and 5 are $350,770, $363,582 and $363,582 respectively. Should the project be accepted?  

Answer 1

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