80.2K

Verified Solution

Link Copied!

P7.1 (LO 2, 3), AP Excel Rustix, a company that makes new furniture that has a worn look to it, has been struggling to keep up with its competitors. But the intern Igor has an idea: make some up-front investments in order to get customers' attention and then reap the rewards of a better product with a higher selling price. Since he's been studying capital budgeting at school, he's confident that he can present his idea and impress his boss with his insight and technical expertise. Here's the plan: - Invest $150,000 in updated equipment and inventory management technology to support the production of zero-defect products, where custom features can be reasonably added to any order on demand. - The new equipment and technology will have a useful life of 8 years, after which the assets will have no market value. - The assets will generate additional net cash inflows due to higher gross margins of $60,000 per year for the life of the assets, less additional operating cash outflows of $30,000 per year for persistent marketing efforts. Before pulling his proposal together, Igor finds out that the company is typically subject to a 24% tax rate. Further, the company has alternative uses for its cash that would easily earn a 6% rate of return. Required a. Is Igor's plan financially viable? Determine the NPV of this proposal and explain what it means if your answer is either a negative or a positive amount. b. Determine the exact IRR for this investment. Would Igor's proposal be acceptable to his boss based on this metric? c. What would the IRR of this investment be if the company actually generated $85,000 in additional net cash inflows for the last 4 years of its life (instead of the $60,000 noted above)? Does this scenario seem reasonable? Explain

Answer & Explanation Solved by verified expert

See Answer