The managers of Poncho Parts, Inc. plan to manufacture engine blocks for classic cars from the 1960’s era. They expect to sell 350 engine blocks annually for the next 5 years, and management believes that the auto restorers will pay $2,000 per engine block. The necessary foundry and machining equipment will require an outlay of $750,000.
This amount will be depreciated straight line to zero over the projects life. The firm expects to be able to dispose of the manufacturing equipment for $150,000 at the end of the project. Labor and material costs total $750 per block, and fixed costs are $150,000 per year. Assume a 32% tax rate and a 12% discount rate.
What is the NPV of the project?
What is the IRR of the project?
Suppose that the project requires an investment of working capital of $150,000, but all else remains the same. What is the free cash flow in time 1 through time 4? Get Finance homework help today
