24 Jul SHOULD THE PROJECT BE ACCEPTED BASED ON THE IRR CRITERION?
FITCO Inc. is a Pharmaceutical company which is considering investing in a new equipment for the pro Show more FITCO Inc. is a Pharmaceutical company which is considering investing in a new equipment for the production of pain-reliever machine for individuals who suffer from cardio vascular diseases. The new equipment will cost $2000000 and an additional $100000 is needed for installation. The equipment which falls into the MACRS 5-yr class would be sold after 5 years for $150000. The equipment will generate additional annual revenues of $965000 and will have annual operating expenses of $300000. An inventory investment of $60000 is required during the life of the project. FITCO is in the 30 percent tax bracket and has the same risk as the firms existing assets. Its existing cost of capital is 15 percent. (a) Calculate the initial outlay of the project (no. units and points) (b) Calculate the annual after-tax operating cash flow for years 1 to 5 (no. units and points) (c) Determine the terminal year non-operating cash flow in year 5 (no. units and points) (d) What is the project NPV (rounded to the nearest hundred) (e) What is the estimated IRR of the project? (f) Should the project be accepted based on the IRR criterion? Show all workings Show less
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