1.AAI, Inc., forecasts unit sales for a potential new product as follows:Year Units of Output95,000107,000110,000The initial investment in Net Working Capital (NWC) is $1,500,000. At the end of the project, theinvestment in NWC is expected to be fully recovered. Total fixed costs are $1,750,000 each year,variable costs are $280 per unit, and the units are sold at $330 each. The new equipment is expected tocost S4,400,000 and will be depreciated using the 3-year MACRS depreciation schedules (relevantdepreciation rates are 33% in year 1, 45% in year 2, 15% in year 3 and 7% in year 4). At the end ofthree years the equipment can be sold for $100,000. If the new project is taken, there will be a negativeeffect on the firm's existing products - cash flow from the firm's existing products will decrease by88,000 on a post-tax basis in years 1, 2, and 3. The tax rate s 40% and AAI Inc's cost ofcapital is 12%Compute the (i) payback period, (ii) NPV, (iii) IRR, and (iv) profitability index of the project.

Please see the table below. Since all the steps are sequential, I have converted the same into a…

Answered: 1. AAI, Inc., forecasts unit sales for…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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