Reference no: EM132352355

You are analyzing a proposal to build a new factory. Use the information below, a cost of capital of 14%, a capital gains tax rate of 5%, and an income tax rate of 40%.

Land for the factory will be purchased today for $500. At the beginning of the second year (one year from today), $1,000 will be spent for the construction of the building. The equipment will be purchased at the beginning of the third year at a cost of $1,500. Operations will begin at the beginning of the fourth year, at which time a working capital investment of $500 will be required. Cash flows from operations will occur for 10 years and will be received at the end of each year.

The building construction cost and the equipment will be depreciated on a straight-line basis, with zero expected salvage for each. Assume that you can't depreciate the building and equipment until you use them in operations. After 10 years of operation, you expect to sell the land for $600.

Annual incremental revenue will be $2,000 for the first 5 years of operation, and $2,250 for the last 5 years of operation. Fixed operating costs (excluding depreciation) will be $300 each year. Annual variable operating costs will be 25% of annual revenue.

The building and equipment both qualify for a 10% investment tax credit that can be received at the time each is purchased. This ITC will not affect the amount you can depreciate.

1. Calculate the NPV for this project.

2. Calculate the IRR for this project, to 2 decimals, like 25.63%.