Reference no: EM133154043
Question - Elsbach Running is considering the introduction of a new line of running shoes. The firm's president, Kim, has come up with the projections of gross profit (revenues - variable costs) and other costs shown below. Relevant facts to project cash flows are the following:
New production equipment will cost $6 million and can be sold after three years for $1 million.
The equipment will be depreciated straight line to zero over five years.
Net working capital will experience a one-time increase of $300,000 at time the project starts, and it will be recovered at the end of third year.
The firm faces a tax rate of 40%.
The shoes will sell 360,000 units at $50 per unit in each of the next three years.
Variable production costs are 50% of revenue.
Fixed production costs are $4 million per year.
Required -
a. What are the annual cash flows associated with the project?
b. What is the IRR of the project?