Heffron Technologies (HT) is considering the introduction of a new product. The code name of the new product is COSA. This new product will require the installation of new plant, which is estimated to cost $500,000. The company is to install the new plant in a factory site that the company acquired one year ago for $600,000, prices have increased dramatically in the area, increasing by 20% over the year. The factory was acquired before the new product was considered and was thought to be a good buy. The factory has been empty for the past year. In addition to the cost of plant, HT will require $300,000 in net working capital to start. The additional net working capital will be recovered in full at the end of the project’s life. HT estimates that sales revenue for the new product will be $700,000 a year for the five-year life of the product. The cash operating costs are expected to be $360,000 a year and include cost of goods sold. HT will use the straight-line method to depreciate all plant over a five-year life. In five years, this plant can be sold for about 10% of its installation cost. The company tax rate is 30% and has a required return on this project is 15 percent. Factory prices are not expected to increase over the life of the project. (5) What is the IRR of this project? (Note：12%

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter13: Capital Budgeting: Estimating Cash Flows And Analyzing Risk

Section: Chapter Questions

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Heffron Technologies (HT) is considering the introduction of a new product. The code name of the new product is COSA. This new product will require the installation of new plant, which is estimated to cost $500,000. The company is to install the new plant in a factory site that the company acquired one year ago for $600,000, prices have increased dramatically in the area, increasing by 20% over the year. The factory was acquired before the new product was considered and was thought to be a good buy. The factory has been empty for the past year. In addition to the cost of plant, HT will require $300,000 in net working capital to start. The additional net working capital will be recovered in full at the end of the project’s life. HT estimates that sales revenue for the new product will be $700,000 a year for the five-year life of the product. The cash operating costs are expected to be $360,000 a year and include cost of goods sold. HT will use the straight-line method to depreciate all plant over a five-year life. In five years, this plant can be sold for about 10% of its installation cost. The company tax rate is 30% and has a required return on this project is 15 percent. Factory prices are not expected to increase over the life of the project. (5) What is the IRR of this project? (Note：12%

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