Use the information below to answer the following question(s).
Neptune Ltd. wants to expand its operations by manufacturing a new product line. New equipment will cost $225,000. Incremental sales are estimated at $150,000 per year for 6 years. Variable costs of producing the new product line are 52% of sales and incremental annual fixed costs are $25,000. The equipment can be salvaged after 6 years for 16% of its original cost. The company's required rate of return for new projects is 18%. Ignore income taxes.
-What is the internal rate of return of the Neptune Ltd. investment?

Question

Quizplus · Accepted Answer

Initial investment = $225,000
Annual cash flows = [$150,000 * 48%] - $25,000 = $47,000 [PV 6 years = $164,387.32]
Salvage value = $225,000*16% = $36,000 [PV = $13,335.54]
NPV = -$225,000 + $164,387.32 + $13,335.54 = ($47,277.14) IRR = 10.00%

Use the Information Below to Answer the Following Question(s)