Reference no: EM132602291

Consider the following facts around a New Project financing:

Equipment Cost of New Equipment 750,000

Life 10

Salvage Value in Year 10:

Reconditioned 300,000

As-is 50,000

Depreciation Straight-Line

Sales Year 1: Sales (units) 5,000, growth rate years 1-5 15% and years 6-10 growth 0 rate

Price, $/unit 22, annual rate of change 5%

Expenses Year 1 Variable Costs, $/unit 5 Year 1 Fixed Costs, $ 50,000 annual rate of change 2.5%

Working Capital Net Working Requirement, % of sales 5.0% and assume it drops to zero in year 10

Tax Rate 23.5%

Questions:

Question 1: Build a 10-year cash flow model using the above facts, and calculate the IRR & NPV assuming the equipment is sold at its as-is value in year 10 (assume 7.5% as discount rate for NPV) Assume zero taxes if there is a loss

Question 2: What is the IRR if equipment is reconditioned at a cost of $150,000?

Question 3: What is the breakeven sales price in year 1, to generate an IRR of 12%, assuming as-is salvage value?