Lowell Inc. projects unit sales for a new project with a life of FOUR YEARS as follows: Year 1 2 3 Unit Sales 10,000 12,000 14,000 16,000 Production will require Lowell must have an amount of NOWC on hand equal to 9 percent of the upcoming year's sales. Total fixed costs are $100,000 per year, variable production costs are $230 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 3 4 Depreciation rate 20% 32% 19% 12% In FOUR years, this equipment can be sold for about 21 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? 17.17% 22.55% 11.40% 12.05%
Lowell Inc. projects unit sales for a new project with a life of FOUR YEARS as follows: Year 1 2 3 Unit Sales 10,000 12,000 14,000 16,000 Production will require Lowell must have an amount of NOWC on hand equal to 9 percent of the upcoming year's sales. Total fixed costs are $100,000 per year, variable production costs are $230 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 3 4 Depreciation rate 20% 32% 19% 12% In FOUR years, this equipment can be sold for about 21 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? 17.17% 22.55% 11.40% 12.05%
Chapter11: Capital Budgeting And Risk
Section: Chapter Questions
Problem 15P
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