Question: Mark, Robert and Norman (MRN) are considering purchasing the assets of Tin Can Corporation, a company in bankruptcy. The previous owners of Tin Can invested $550,000 in a revolutionary waste management system and were on the point of launching the service, but ran out of money. The machinery for this system will be sold to MRN for $800,000.
The equipment can be put into use immediately and it is expected to generate revenues of $500,000 annually, with expenses of $280,000. Accounts receivable will increase by $75,000 at the beginning of the project to support sales.
If the project proceeds, an overhaul of the equipment will be required at the end of years 4 & 8 at a cost of $200,000 each time (cost to be capitalized). It is expected that the project will run for 12 years. When the project finishes, it is expected that the equipment can be salvaged for $180,000. The CCA rate for the equipment is 25%, the firm has a tax rate of 35%, and it is a WACC of 12%.
Compute the NPV of this project and show all calculations.
Explain why calculating the IRR with your calculator would be unreliable in this situation.