(Solved): Red Manufacturing Co. is planning to purchase a new machine. The machine costs $1.8M and has a usef ...

Red Manufacturing $\mathrm{Co}$. is planning to purchase a new machine. The machine costs $\$1.8\mathrm{M}$ and has a useful life of 10 years. The firm uses straight line depreciation to depreciate all assets. The firm projects revenues from the machine to be $\$6.2\mathrm{M}$ per year and to increase slightly faster than inflation, at $5\%$ per year. Manufacturing costs are $90\%$ of revenue. If the machine were not purchased, Red Manufacturing Co could lease out the vacant factory space at a rental cost of $\$200\mathrm{K}$ per year. Red Manufacturing Co projects that they can increase the rental fee by $4\%$ each year due to inflation. The firm suspects they will need to end production in year 8 , thus putting the now-used equipment up for sale and expect to be able to sell the equipment for $\$600\mathrm{K}$ at the end of that year. Additionally, the firm anticipates they will need to build inventory levels ahead of production, and so will need initial working capital - the initial WC need is $\$450\mathrm{K}$, and they expect that working capital annual needs are $10\%$ of annual revenue. The tax rate of the firm is $25\%$ and the firm's required rate of return is $12\%$. What is the NPV of this project, and should the firm proceed or abandon the machinery expansion? What is the IRR of this project?