Chapter 6, Problem 32QAP

Summary Introduction

Adequate information:

Year	Unit Sales
1	73,000
2	79,000
3	84,000
4	82,000
5	68,000

Initial net working capital (NWC) = $1,500,000

Additional net working capital for Year 1 to Year 4 will be 15% of the projected sales increase in the following year.

Total fixed costs = $3,400,000

Variable cost per unit = $145

Price per unit = $325

Cost of equipment (C) = $18,500,000

Market value = 20% of acquisition cost

Tax rate = 23% or 0.23

Required rate of return, r = 18% or 0.18

To compute: The Net Present Value (NPV) and internal rate of return (IRR) of the project.

Introduction:

Internal rate of return (IRR) is defined as the discount rate at which the aggregate present value of net cash inflows is equal to the aggregate present value of net cash outflows of the project.

Net present value (NPV) is defined as the summation of the present value of cash inflows in each period minus the summation of the present value of cash outflow.