Reference no: EM132921509

Question - After spending $500,000 last year to study the potential market for a new specialty chemical, Ants Inc wants to open a new plant to produce this new chemical.

The project has an anticipated economic life of five years.

The company will purchase $8,000,000 in new plant and equipment. The IRS will allow Ants Inc to depreciate the plant and equipment on a straight-line basis over a six-year useful life. The salvage value is $500,000.

At the end of the project (i.e., year 5), they expect to sell the plant and equipment for $1,500,000.

The forecasted revenue is $15 million per year for each of the next five years (beginning in year 1).

Assume that variable costs are 65% of revenue. Fixed costs for the project are estimated to be $2,000,000 annually.

Interest expense related to borrowing for the project is $750,000 per year.

Start-up net working capital requirements for the project are expected to be $1,500,000 (i.e., year 0). The net working capital requirements will be $1,000,000 annually from year 1 to 5. At the end of the five-y ar project, the initial investment in net working capital will be recovered.

The new product is expected to increase the after-tax sales of the company's existing products by $170,000 a year.

Ants' opportunity cost of capital is 12%, and their average tax rate is 30% and their marginal tax rate is 35%.

Required -

a) Calculate the NPV of this project.

b) Calculate the IRR of this project.

c) Would you accept or reject this project?