A company is considering a project with a 6-year economic life. The project is expected to cost $200,000 and have a salvage value of $30,000. 5 year MACRS depreciation will be used. The company has a 10% cost of capital and a marginal tax rate of 35%. Careful analysis reveals that the company should expect to sell 100,000 toys during the first year of operations at $5.00 per unit. The first year COGS is expected to be $3.75 per toy. It is expected that inflation will cause revenues to increase by 3.5% per year and the COGS to increase by 3.25% per year for the projects life. Increased demand is expected to increase the quantity produced and sold by 3% per year. The project will require a $25,000 increase in working capital at the beginning of the project.
b. If the cost of capital was to increase to 11%, recomputed the NPV, MIRRR, and profitability index for the project.
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NPV IRR Calculations
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a. Calculate the NPV, IRR, Profitability Index, and MIRR for this project with a cost of capital of 12%.
b.For a single conventional project, the NPV and IRR will agree on whether to invest or to not invest. However, in the case of two mutually exclusive projects, the two criteria will sometimes disagree.Explain the two primary factors that cause NPV and IRR to conflict when evaluating mutually exclusive projects.View Full Posting Details