hornley Machines is considering a 3-year project with an initial cost of $750,00
ID: 2633098 • Letter: H
Question
hornley Machines is considering a 3-year project with an initial cost of $750,000. The project will not directly produce any sales but will reduce operating costs by $420,000 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 $81,000. The tax rate is 34 percent. The project will require $19,000 in extra inventory for spare parts and accessories. Should this project be implemented if Thornley's requires a rate of return of 15 percent? Why or why not?
Explanation / Answer
initial cost = 750000 + 19000 = 769000
depriciation per year = 750000/3 = 250000
operating cash flow per year = (420000) * (1-0.34) + 250000 * 0.34
= 362200
terminal cash flow = 81000 * (1-0.34) + 19000 = 72460
NPV
= -769000 + 362200 * [1-(1.15)^-3]/0.15 + 72460/1.15^3
= 105627.76
since NPV is positive , we should accept project
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