The following data have been collected by capital budgeting analysts at Sunset Beach Inc. concerning an investment in an expansion of the company's product line. Analysts estimate that an investment of $500,000 will be required to initiate the project at the beginning of 2021 The estimated cash returns from the new product line are summarized in the following table; .assume that the returns will be received in a lump sum at the end of each year:
Year Amount of Cash Return
2022.. $126.000 2023 162,000 2024 195,000 2025 144,000
The new product line will also require an investment in inventory and receivables of 580.000: this investment will become available for other purposes at the end of the project. The salvage value of machinery and equipment at the end r roduct line's life is expected to be $75,000. The cost of capital used in Sunset Beach's capital laudgeting — is is 12%.
Required:
a. Calculate the net present value of the proposed investment. Ignore inane to and (01_17c a :1! ansers to the nearest $1.
b. Calculate the present value ratio of the investment.
c. What will the internal rate of return on this lnvestment be relative to the cost of capitai?
d. Calculate the payback period of the investment e. Based on the quantitative analysis. would you recommend that the product line expanston project be undertaken'? Explain your answer.