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Question - The Volunteer Company (VC) produces electrical switching components and is considering manufacturing a new component that will require new equipment. The production of this component will require $1,500,000 in net working capital to start and additional net working capital investments each year equal to 15percent of the projected sales increases for the following year. Total fixed costs are $1,350,000 per year, variable production costs are $225 per unit and the units are priced at $345 each. The equipment needed to begin production has an installed cost of $23,000,000. The equipment is considered to qualify as seven year MACRS property. In five years, the equipment can be sold for 20 percent of its acquisition cost. VC is in the 35 percent marginal tax bracket and has a required return on all its projects of 18 percent. Based on the preceding project estimates, answer the following questions:
A. What is the total cash flow of the project for Year 3?
B. What is the NPV of the project?
C. What is the IRR of the project?
D. Should VC begin this project? Explain.
The adjustment of $8,175 for accrued fees earned was journalized as a debit to Accounts Receivable for $8,175 and a credit to Fees Earned for $8,157.
Carter Air Lines is now in the terminal year of a project. The equipment originally cost $20 million, of which 80 percent has been depreciated.
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