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The firm is considering a new project, which requires an initial investment in equipment of 90,000 and also an initial investment in working capital of 10,000 (at t = 0). You expect the project to produce sales revenue of 120,000 per year for three years. You estimate manufacturing costs at 60% of revenues. (Assume all revenues and costs occur at year-end) The equipment fully depreciates using straight-line depreciation over three years. At the end of the project, the firm can sell the equipment for 10,000 and also recover the investment in net working capital.
Question a. Find the project's payback period, IRR, NPV and profitability index.
Question b. Should the company invest in the project? Explain.
Question c. Does your decision in (b) depend on the way the project is financed? If so, how?
Also, in your view, what would be the next steps for improvement that the company would need to undertake in order to correct the problem? Explain your reasoning.
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