Calculate OCFs for this project

Reference no: EM132206483

Question - Project X involves a new type of graphite composition in-line skate wheel. We think we can sell 4,000 units per year at a price of $900 each. Variable costs will run about $400 per unit, and the product should have a four-year life.

Fixed costs for the project will run $450,000 per year. Further, we will need to invest a total of $1,250,000 in manufacturing equipment. This equipment is seven-year MACRS property for tax purposes. In four years, the equipment will be worth about half of what we paid for it. We will have to invest $1,150,000 in net working capital at the start.

a. Calculate OCFs for this project.

b. What is the project's IRR?

c. Should the project be accepted using IRR?

Table - Modified ACRS depreciation allowances (MACRS)

Class	Examples
Three-year	Equipment used in research
Five-year	Autos, computers
Seven-year	Most industrial equipment

Year	Property class
Year	Three-year	Five-year	Seven-year
1	33.33%	20.00%	14.29%
2	44.45	32.00	24.49
3	14.81	19.20	17.49
4	7.41	11.52	12.49
5		11.52	8.93
6		5.76	8.92
7			8.93
8			4.46

Reference no: EM132206483

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