FITCO is considering the purchase of new equipment. The equipment costs $346000, and an additional $109000 is needed to install it. The equipment will be depreciated straight-line to zero over a 5-year life. The equipment will generate additional annual revenues of $275000, and it will have annual cash operating expenses of $82000. The equipment will be sold for $80000 after 5 years. An inventory investment of $74000 is required during the life of the investment. FITCO is in the 40 percent tax bracket, and its cost of capital is 9 percent. What is the project NPV?

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Irving HeathcoteLv2

28 Sep 2019

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3. Determine the terminal year non-operating cash flow in year 5

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6. Should the project be accepted based on the IRR criterion?

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The equipment line will generate additional annual revenues of $865,000, and will have additional annual operating expenses of $500,000. An inventory investment of $90,000 is required during the life of the project. FITCO is in the 35 percent tax bracket, and its existing cost of capital is 6 percent.

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