Gemini is looking to make a $125,000 investment in a motor. The motor has a 5 ye

Question

6. Gemini is looking to make a $125,000 investment in a motor. The motor has a 5 year expected life and no terminal disposal value. Management believes the new motor will yield $35,000 in annual savings in cash operating costs. Gemini’s required rate of return is 10% and their tax rate is 30%.
   1. Determine the net present value, payback period, discounted payback period, and internal rate of return for this investment.
   2. Should Gemini make this investment? Why or why not?

6. Gemini is looking to make a $125,000 investment in a motor. The motor has a 5 year expected life and no terminal disposal value. Management believes the new motor will yield $35,000 in annual savings in cash operating costs. Gemini’s required rate of return is 10% and their tax rate is 30%.
   1. Determine the net present value, payback period, discounted payback period, and internal rate of return for this investment.
   2. Should Gemini make this investment? Why or why not?

Explanation / Answer

NPV Annual savings 35000 Less: Depreciation (125000/5) 25000 Savings after dep 10000 Less: Tax @30% 3000 Income aftere tax 7000 Add: Depreciation 25000 Annual cash inflows 32000 Annuity factor f or 5 years at 10% 3.7908 Present value of Inflows 121305.6 Less: Initial Investment 125000 Net present value -3694.4 Payback period: Initial Investment / Annual cash inflows 125000/32000 = 3.91 years Discounted payback period: As NPV above is negative, the project is not ableto recover its investment within 5 years. IRR: Discount at 8.85% Annual cash inflows 32000 Annuity factor f or 5 years at 8.85% 3.9048 Present value of Inflows 124953.6 Less: Initial Investment 125000 Net present value -46.4 IRR: 8.85% approx

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