FITCO Inc. 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 $1,550,000 for manufacturing the parts and an additional $130,000 is needed for installation. The equipment falls into the MACRS 3-yr class, and would be sold after four years for $400,000. The equipment line will generate additional annual revenues of $865,000, and will have additional annual operating expenses of $500,000. An inventory investment of $90,000 is required during the life of the project. FITCO is in the 35 percent tax bracket, and its existing cost of capital is 6 percent.
The INITIAL OUTLAY is -$1770000
A. Calculate the annual after-tax operating cash flow for Years 1 -4.
B. Determine the terminal year (in year 4) after-tax non-operating cash flow.
C. What is the equipment’s NPV?
D. What is the estimated Internal Rate of Return (IRR) of the project?