Evaluate the following investment proposal.
All-Sweets Inc. is considering developing a new product, Stay-Slim-Choclate bars. To produce the choclate bars, a $150,000 investment in machinery is necessary. Machinery will be depreciated to a salvage value of zero. The lifetime of the newly introduced product is 5 years. Machinery is expected to be sold at the end of the lifetime for $10,000.
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In the first year, an annual revenue of $90,000 is expected from the sale of Stay-Slim chocholate bars. Annual cash expense (expenses excluding depreciation) are expected to be 30% of revenues. Annual revenues are expected to increase by inflation rate, which is expected to be 5% annually over the next five years.
Before product launch, an investment in working capital is required (before the start of operations) and it is estimated to be 10 percent of next yearĂ˘â‚¬â„˘s sales level. Working capital will be recovered at the end of the product lifetime. In order to investigate the market response to the Stay-Slim product, an additional $18,000 was spent before seriously considering the investment alternative.
The firmĂ˘â‚¬â„˘s tax rate is 25% and the required rate of return for this new product is 12%.
Calculate the IRR of the project.