The firm uses straight-line depreciation

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Talia’s Tutus is considering purchasing a new sewing machine. The old machine it has right now was bought 2 years ago for $30,000, with an assume life of 5 years and an assume salvage value of $5,000. The firm uses straight-line depreciation. The old machine can be sold for $25,000. The new machine can be purchased today for $40,000. The new machine will have a 5-year life and will be depreciated to $5,000 using straight-line depreciation. With the new sewing machine, the firm is expected to have additional revenue of $15,000 for each of the next five years. The variable cost is 40% of the revenue, and the fixed cost is $3,000 each year. Suppose Talia’s Tutus allows its customers to pay their bills with an average 3-month delay, and its inventories are 15% of next year’s expense. If the opportunity cost of capital is 12%, corporate tax rate is 35%, and capital gain tax is 15%, what are the project’s NPV and IRR? What happens to NPV when your revenue goes up by 10% because of a good economy?

Reference no: EM13948936

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