Should mummy start the new line

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Reference no: EM133633059

Question: Mummy Group is considering a new product line. The new line requires a machine that costs $21,000,000. It will be fully depreciated to a zero-book value on a straight-line basis over 3 years. Sales are $65M per year for years 1, 2 and 3. Operating expenses are 60% of sales. Mummy will have $4,000,000 annually in interest expenses as part of the financing of the machine. The initial investment in net working capital is $2 million and all of this is returned in year 3. The tax rate is 25% and the cost of capital is 11%.

Find the free cash flows for the project (so you will have time 0, 1, 2, and 3).
Find the internal rate of return.
Find the net present value.

Using the IRR to make the decision, should Mummy start the new line? Explain using the IRR.

Reference no: EM133633059

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