Problem:
A firm is considering investing in a new product with a five-year life. To do this it will need to buy new equipment that costs $10 million and that has a salvage value of $500,000. This equipment depreciates straight-line over its five year life. The product sells at $20 per unit. Sales are expected to start at 600,000 units and to grow at the rate of 5% per year. The variable cost per unit is $12. Other than depreciation, you expect fixed costs of $120,000 per year. The firms tax rate is 40 and the firm requires an investment of $20,000 in working capital each year.
Required:
Question: Find the NPV, IRR, PI using a required return of 10%.
Note: Please show how you came up with the solution.