Affinity Inc is considering a 3-year project with an initial equipment cost of $618,000. The company’s R&D department spent $50,000 in developing the process improvement. The project will not directly produce any sales but will reduce operating costs by $265,000 a year. The equipment is depreciated straight-line to a zero book value over the life of the project. At the end of the project, the equipment will be sold for an estimated $60,000. The tax rate is 34 percent and applies to both regular income and capital gains/losses. The project will require an increase in NWC of $23,000 to buy inventory for spare parts and accessories. (5 points)

a) Should this project be implemented if Affinity requires a 9 percent rate of return?



b) What is the IRR of the project?




c) If the cost of capital for Affinity were to double, how would that impact your decision?

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