Rum Co has asked you to evaluate the following proposal. Rum Co is contemplating the purchaseof a new machine for $1,500,000 to produce a new rum drink. This machine would be used for 4years, after which the machine will be worthless. Launch of the new rum drink will also require a$100,200 increase in working capital - an increase which will be recovered at the end of the 4years (when the drink is pulled from the market and the machine reaches the end of its useful life).Over this 4-year product life, Rum Co estimates incremental annual sales of $660,000 andincreased annual cash-costs of $12,500. Based on Rum Co's discount rate of 18.0% and a marginaltax rate of 21.0% please answer the following for Rum Co's management:a) [2 pts] What is the total initial investment for this project?b) (2 pts] What is the project's incremental after-tax cash flow in year 1?c) [2 pts] What is the project's incremental after-tax cash flow in year 4?d) [1 pt) If the calculated IRR for this project is 19.2%, should Rum Co accept this project? Whyplease explain your answer.e) 10 Extra Credit Points: What is the Net Present Value of this project?

Free cash flow is that amount which is earned by the investor from the project. It is the net amount…

Answered: Rum Co has asked you to evaluate the…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section: Chapter Questions

Problem 4P

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