Reference no: EM132499182

Louie's Leisure Products is considering a project which will require the purchase of $1,000,000 in new equipment. The company plans to pay only half of this purchase price at the beginning and the rest will be paid over 5 years ($500,000 will be paid at the purchase item in 2020, and each year the company will pay $100,000). The machine will be good for 5 years. Depreciation will be $120,000 per year (year 2021 to year 2025), with $400,000 salvage value (after tax) at the end of year 2025. This project will require an upfront investment in inventory of $100,000 that will be reclaimed at the end of the project. It will allow the company to process and sell additional products generating $900,000 increase in sale per year. Total costs will be $400,000 per year, and the tax rate is 35%. This project will be located in a building currently owned by the company with the annual rent of $5,000. The managerial team has already paid an analyst $700 to forecast the cash flows mentioned above. The required return on this project is 20%.

Based on Net Present Value (NPV), is this project worth taking on?