Question

FR&AM Incorporated just introduced a new light

-

weight tennis racket

. The

rackets

will

sell for $865 and have a variable cost of $425

.

The company has spent $

500

,000 for a

marketing study that

determined the company will sell 70,600

light

-

weight rackets

per

year for seven years. The marketing study also determined that the company will lose

sales of 13,800 its high

-

priced

rackets

. The high

-

priced

rackets

sell at $1,235 and have

variable costs of

$695. The fixed costs each year will be $10,750,000. The company has

also spent $2,900,000 on research and development for the new

racket

. The plant and

equipment will cost $39,200,000 and will be depreciated on a straight

-

line basis to zero

over the

10

-

y

ear tax

life of the project. After 7 years the equipment will be sold for

1,250,000. The new

rackets

will also require an increase in net working capital of

$3,600,000. The tax rate is 21 percent, and the cost of capital is 12 percent. What are

the NPV and

IRR of the project?

Answer 1