The Carter Corporation, a firm in the 25% marginal tax bracket, with a 15% required rate of return or discount rate, is considering a new project. This project involves the introduction of a new product. This product is expected to last 5 years and then, because it is somewhat of a fad product, it will be terminated. Cost of new plant and equipment: $380,000,000 Shipping and installation costs: 20,000,000 Unit sales: Year Units Sold 1 2,000,000 2. 2,000,000 3. 2,000,000 4. 1,500,000 5. 1,500,000 Sales price per unit: $800/unit in years 1-3 and $600/unit in years 4 and 5 Variable cost per unit: $400/unit throughout the five years Annual fixed costs: $250,000,000 There will be an initial working capital requirement of $2,000,000 just to get production started. At the conclusion of the project, the plant and equipment can be sold for $100,000,000. The plant and equipment will be depreciated over five years on a straight-line basis to a zero-salvage value. Required: Determine the payback period for the project. Determine the net present value of the project. Determine the internal rate of return of the project. Explain why you would or would not recommend the project.
The Carter Corporation, a firm in the 25% marginal tax bracket, with a 15% required
Cost of new plant and equipment: $380,000,000
Shipping and installation costs: 20,000,000
Unit sales:
Year Units Sold
1 2,000,000
2. 2,000,000
3. 2,000,000
4. 1,500,000
5. 1,500,000
Sales price per unit: $800/unit in years 1-3 and $600/unit in years 4 and 5
Variable cost per unit: $400/unit throughout the five years
Annual fixed costs: $250,000,000
There will be an initial working capital requirement of $2,000,000 just to get production started. At the conclusion of the project, the plant and equipment can be sold for $100,000,000. The plant and equipment will be depreciated over five years on a straight-line basis to a zero-salvage value.
Required:
- Determine the payback period for the project.
- Determine the
net present value of the project. - Determine the
internal rate of return of the project. - Explain why you would or would not recommend the project.
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