Reference no: EM133239442

A 5-year investment project requires an investment in fixed assets of $1,800,000 and an initial investment in working capital of $400,000. The investment in fixed assets will be depreciated by 90%, while the investment in working capital will be replaced updated with inflation, which requires an additional investment in working capital each year; a straight-line depreciation method is to be used; expected inflation is 10%. The fixed asset is expected to be sold at the end of 5 years for $600,000. The initial investment (fixed assets and working capital) for a value of $2,200,000 will be financed 40% with a 5-year loan, which is amortized in two equal payments at the end of years 4 and 5; The interest rate of this loan is 15%. Earnings before interest and taxes, under the depreciation assumptions just mentioned, are, respectively, for the 5 years, $1,000,000, $1,100,000, $1,200,000, $1,450,000, $1,900,000. The tax rate is 30%. Assume a 20% TIO.

1. Calculate the NPV and the IRR of the project itself (FCL).

2. Calculate the NPV and the IRR of the own resources contributed to the project (FCI).

3. Answer if the project is viable and why.