Question

Nyke inc. is a sporting shoes company which is considering investing in a new equipment for the production of a new line of tennis and football shoes for its elite customers. The new equipment will costs $250,000 and an additional $80,000 is needed for installation. The equipment which falls into the MACRS 3-yr class, would be sold after three years for $35,000. The equipment will generate additional annual revenues of $210,000 and will have annual operating expenses of $60,000. An inventory investment of $60,000 is required during the life of the project. Nyke is in the 30 percent tax bracket, and has the same risk as the firm’s existing assets. Its existing cost of capital is 15 percent.

1. Calculate the initial outlay of the project
2. Calculate the annual after-tax operating cash flow for years 1-3
3. Determine the terminal year (in 3 years) after tax non operating cash flow
4. What is the project NPV?
5. What is the estimated internal rate of return of the project? Should the project be accepted based on the IRR criterion? Why?

Answer 1