Question

Read Book Company is the manufacturer of exercise machines and is considering producing a new line...

Read Book Company is the manufacturer of exercise machines and is considering producing a new line of equipment in an effort to increase its market share.  
The new production line will cost $850,000 for manufacturing the parts and an additional $280,000 is needed for installation.
The equipment falls into the MACRS 3-yr class, and would be sold after four years for $350,000. The equipment line will generate additional annual revenues of $600,000, and will have additional annual operating expenses of $300,000. An inventory investment of $75,000 is required during the life of the project. Read Book Company is in the 25 percent tax bracket, and its existing cost of capital is 8 percent.

a. Calculate the initial outlay of the project

b. Calculate the annual after-tax operating cash flow for Years 1 -4.

c. Determine the terminal year non-operating cash flow in year 4:

d. What is the equipment NPV?  

e. What is the estimated Internal Rate of Return (IRR) of the equipment?  

f. Should the equipment be accepted based on the IRR criterion?  

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Answer #1

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As the NPV is negative, it is not worthy to investment in the equipment.

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