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FX, Inc. is a volume manufacturer of high technology automotive mirrors (including cell link and voice...

FX, Inc. is a volume manufacturer of high technology automotive mirrors (including cell link and voice activation). FX is looking to expand its operations to add a second product. The equipment investment cost for this new operation is $125,000. The project falls under a 7-year MACRS class life and the company estimates that the salvage value will be $50,000 at the end of the 5-year project. The annual revenue for the new line is $100,000. The annual manufacturing costs are listed below:

  • Labor: $20,000
  • Materials: $12,000
  • Maintenance: $8,000

Questions:

  1. If this project only requires operating and investing activities, determine the project cash flows and find the NPV. The income tax rate is 40% and the MARR is 15%.
  2. If the company borrowed $125,000 from the bank at an interest rate of 10% for 6 years. Determine the cash flow and find the NPV. The income tax rate is 40% and the MARR is 15%.
  3. From the initial problem, find the interest rate when the company will give up the option to borrow fund.

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