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-year 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? Please show any formulas used to find solution.

Answer 1

depreciation per year=39200000/10=3920000

Book value of equipment at end of 7 years:=3920000*7=actual value-depreciaiton

=39200000-(7*3920000)=11760000

market value=1250000

After tax salvage value= market-(tax rate*(market -book))