Reference no: EM132719753

Your company is considering a five-year project to boost your sales. By purchasing a new machine, you expect to increase sales by 800 units in year 1, 900 units in year 2, and 1000 units in years 3, 4 and 5. The per unit price is $50, and per unit cost is $20. Fixed cost is $500 every year. A new machine costs $40,000, and it will be depreciated to 0 over five years using a straight-line depreciation scheme. You expect that your inventory is going to increase by $2,000 every year, starting from year 1 (remember that we always recover net working capital at the final period though!). A market salvage value of the machine is going to be $10, 000. Tax rate is 15%, required rate of return is 20%.

(a) Compute NPV of this project. Should you take it?

(b) Suppose now that you expect fixed cost to increase to $1,000 starting from year 3. Variable cost is also going to increase to $30 starting from year 3. Should you still take this project?

(c) Suppose that costs are the same as in part (b). What is IRR of the project (i.e., return that would NPV equal to 0)? Formulate the IRR rule for this project.