The Virginia Cane Company (VCC) is considering investing in a new cane manufacturing machine that has an estimated life of 4 years. The cost of the machine is $60,000 and the machine will be depreciated straight-line over its 4-year life to a salvage value of SO Internally, management thinks the cane machine can be sold for $3,000, excluding applicable tax, at project end.
In the first year. VCC expects to sell 2, 500 canes The number of canes sold each year is estimated to grow by 10%. VCC forecasts that the sale price of $18 per cane will remain unchanged over the life of the project.
The firm's total cost to make each cane, not including depreciation, is $9 per cane, and this cos is expected to remain unchanged over the life of the project.
Installation of the machine and the resulting increase in sales will require increases in working capital. ABC is budgeting that working capital needs each year will be 10% of the next year's revenues.
The firm faces a marginal tax rate of 35% and a discount rate of 11%. Calculate the project s NPV and IRR. Should the project be accepted? Show your work.