The Shoe Store has decided to sell a new line of shoes that will have a selling
ID: 2710706 • Letter: T
Question
The Shoe Store has decided to sell a new line of shoes that will have a selling price of $79 and a variable cost of $38 per pair. The company spent $187,000 for a marketing study that determined the company should sell 112,000 pairs per year for five years. The marketing study also determined that the company will lose sales of 28,000 pairs of its high-priced shoes that sell for $109 and have variable costs of $54 a pair. The company will also increase sales of its in expensiveshoes by 39,000pairs. The inexpensive shoes sell for $39 and have variable costs of $24 per pair. The fixed costs each year will be $2.84 million. The company has also spent $1.29 million on research and development for the new shoes. The plant and equipment required will cost $18.6 million and will be depreciated on a straight-line basis over the life of the project. The new shoes will also require an increase in net working capital of $847,000 that will be returned at the end of the project. The tax rate is 34 percent, and the cost of capital is 12 percent. What is the IRR for the new line of shoes?
A. -18.33%
B. 17.82%
C. 16.11%
D. -13.49%
E. 16.62%
Explanation / Answer
Year 0 Cash Flow = - plant and equipment cost - increase in net working capital
Year 0 Cash Flow = - 18600000- 847000
Year 0 Cash Flow = -19,447,000
Annual Depreciation = plant and equipment cost/useful life
Annual Depreciation = 18600000/5
Annual Depreciation = 3720000
Annual Operating cash Flow = (New Line of shoe*(sell price - variable cost) - No of High Shoe paired lost*(sell price - variable cost per unit) + increase sales of its in expensiveshoes*(sell price - variable cost)- fixed costs)*(1-tax rate) + Annual Depreciation*tax rate
Annual Operating cash Flow = (112000*(79-38) - 28000*(109-54) + 39000*(39-24) - 2840000)*(1-34%) + 3720000*34%
Annual Operating cash Flow = $ 1,790,820
Terminal Value = net working capital
Terminal Value = 847000
IRR = rate(nper,pmt,pv,fv)
IRR = rate(5,1790820,-19447000,847000)
IRR = -18.33%
Answer
A. -18.33%
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