The Volunteer Company (VC)
The Volunteer Company (VC) produces electrical switching components and isconsidering manufacturing a new component that will require new equipment.The production of this component will require $1,500,000 in net working capital tostart and additional net working capital investments each year equal to 15percent of the projected sales increases for the following year. Total fixed costsare $1,350,000 per year, variable production costs are $225 per unit and theunits are priced at $345 each. The equipment needed to begin production has aninstalled cost of $23,000,000. The equipment is considered to qualify as sevenyearMACRS property. In five years, the equipment can be sold for 20 percent ofits acquisition cost. VC is in the 35 percent marginal tax bracket and has arequired return on all its projects of 18 percent. Based on the precedingproject estimates, answer the following questions:Questions
A. What is the total cash flow of the project for Year 3?
B. What is the NPV of the project?
C. What is the IRR of the project?
D. Should VC begin this project? Explain