QUESTIONS NUMBERS 6 - 8 HAVE COMMON INFORMATION ON NEW PROJECT
Lowell Inc. projects unit sales for a new project with a life of FOUR YEARS as follows:
Year
Unit Sales
1
10,000
2
12,000
3
14,000
4
16,000
Production will require Lowell must have an amount of NOWC on hand equal to 7 percent of the upcoming year’s sales. Total fixed costs are $100,000 per year, variable production costs are $220 per unit, and the units are priced at $300 each. The sale price and variable costs will increase by 2 percent every year. The equipment needed to begin production has an installed cost of $2,000,000. The equipment qualifies as 5-year MACRS property.
Years
1
2
3
4
Depreciation rate
20%
32%
19%
12%
In FOUR years, this equipment can be sold for about 19 percent of its acquisition cost. Lowell is in the 25 percent marginal tax bracket and has a required return on all its projects of 18 percent. Based on these preliminary project estimates, what is the IRR of the project?
11.40%
12.05%
22.55%
17.17%