Evergreen Company is investigating the feasibility of buying a new production line producing a new product. They project unit sales as in the below table, and they project price per unit to be $120...

Evergreen Company is investigating the feasibility of buying a new production line producing a new product. They project unit sales as in the below table, and they project price per unit to be $120 per unit at the beginning. And when competition catches up after 3 years (in the 4th year), they anticipate that the price would drop to $110. This project requires $20,000 in net working capital at the beginning. Subsequently, total net working capital at the end of each year would be about 15% of total sales for that year. The variable cost per unit is $60, and total fixed costs are $25,000 per year. It costs about $900,000 to buy the equipment necessary to begin the production. This investment is primarily in industrial equipment and falls in Class 8 with a CCA rate of 20%. The equipment will actually be worth about $150,000 in eight years. The relevant tax rate is 40% and the required return is 15%.

Years     Unit Sales

1                3000

2                5000

3                6000

4                6500

5                6000

6                5000

7                4000

8                3000

Question 1

Assume that the asset class will remain OPEN, calculate the NPV.

Question 2

Calculate the IRR (assuming that the asset class remain OPEN)