Reference no: EM132524445

lobatt, Inc., forecasts unit sales for a new dry cell battery project as follows:

Year Unit Sales

1 $82,000

2 88,000

3 96,000

4 90,000

5 74,000

Production of the batteries will require $1,400,000 in net working capital to start and additional net working capital investments each year equal to 15 percent of the projected sales increase for the following year. Total fixed costs are $1,950,000 per year, variable production costs are $190 per unit, and the units are priced at $365 each. The equipment needed to begin production has an installed cost of $19,500,000. Because the batteries are intended for racing cars, this equipment is considered industrial machinery and thus qualifies as seven-year MACRS property. In five years, this equipment can be sold for about 20 percent of its acquisition cost. The company is in the 35 percent marginal tax bracket and has a required return on all its projects of 20 percent.

Based on these preliminary project estimates,

§ what is the NPV of the project?

§ What is the IRR?

§ Should the company pursue?