The managers of Poncho Parts, Inc. plan to manufacture engine blocks for classic cars from the...

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The managers of Poncho Parts, Inc. plan to manufacture engineblocks for classic cars from the 1960s era. They expect to sell 250blocks annually for the next 5 years. The necessary foundry andmachining equipment will cost a total of $800,000. This amount willbe depreciated on a straight-line basis to zero over the project'slife. The firm expects to be able to dispose of the manufacturingequipment for $150,000 at the end of the project. Labor andmaterials costs total $500 per engine block, fixed costs are$125,000 per year. Assume a 35% tax rate and a 12% discountrate.
Assume that management believes that auto restorers will pay$3,000 retail per engine block.
What is the IRR of the above project?
a- 39.53%
b- 31.12%
c- 47.57%
d- 51.28%
e- 56.60%

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4.0 Ratings (537 Votes)

OPTION A is rightThe Annual operating cash flows are as belowOCFSLYearSalesLabour and materialFixed See Answer

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The managers of Poncho Parts, Inc. plan to manufacture engineblocks for classic cars from the 1960s era. They expect to sell 250blocks annually for the next 5 years. The necessary foundry andmachining equipment will cost a total of $800,000. This amount willbe depreciated on a straight-line basis to zero over the project'slife. The firm expects to be able to dispose of the manufacturingequipment for $150,000 at the end of the project. Labor andmaterials costs total $500 per engine block, fixed costs are$125,000 per year. Assume a 35% tax rate and a 12% discountrate.Assume that management believes that auto restorers will pay$3,000 retail per engine block.What is the IRR of the above project?a- 39.53%b- 31.12%c- 47.57%d- 51.28%e- 56.60%