You are considering starting a new factory producing small electric heaters. Each unit will sell at a price of $55. The production cost of each heater is $35. You are expecting to sell 9000 units per year. This project has an economic life of 6 years. The project requires an investment of $700000 in plants and equipment. This equipment will be depreciated to zero salvage value based on 5-year MACRS schedule. The depreciation rates from year 1 to 6 are 20 % 32 %, 19.2 %, 11.52 %, 11.52 %, and 5.76 percent, respectively. The required rate of return for the project is 12 percent, the working capital requirement is 10 percent of the next year's sales revenue. The company will sell its old equipment for $100,000. The old machine is fully depreciated. The marginal corporate tax rate is 20 percent. At the termination of the project, the plant and equipment will be sold for an estimated value of $50000. Based on these assumptions, estimate the internal rate of return for this project.

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
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**QUESTION 6**

You are considering starting a new factory producing small electric heaters. Each unit will sell at a price of $55. The production cost of each heater is $35. You are expecting to sell 9,000 units per year. This project has an economic life of 6 years. The project requires an investment of $700,000 in plants and equipment. This equipment will be depreciated to zero salvage value based on a 5-year MACRS schedule. The depreciation rates from year 1 to 6 are 20%, 32%, 19.2%, 11.52%, 11.52%, and 5.76% respectively. The required rate of return for the project is 12%. The working capital requirement is 10 percent of the next year's sales revenue. The company will sell its old equipment for $100,000. The old machine is fully depreciated. The marginal corporate tax rate is 20%. At the termination of the project, the plant and equipment will be sold for an estimated value of $50,000. Based on these assumptions, estimate the internal rate of return for this project.
Transcribed Image Text:**QUESTION 6** You are considering starting a new factory producing small electric heaters. Each unit will sell at a price of $55. The production cost of each heater is $35. You are expecting to sell 9,000 units per year. This project has an economic life of 6 years. The project requires an investment of $700,000 in plants and equipment. This equipment will be depreciated to zero salvage value based on a 5-year MACRS schedule. The depreciation rates from year 1 to 6 are 20%, 32%, 19.2%, 11.52%, 11.52%, and 5.76% respectively. The required rate of return for the project is 12%. The working capital requirement is 10 percent of the next year's sales revenue. The company will sell its old equipment for $100,000. The old machine is fully depreciated. The marginal corporate tax rate is 20%. At the termination of the project, the plant and equipment will be sold for an estimated value of $50,000. Based on these assumptions, estimate the internal rate of return for this project.
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