diltz farms is considering investing in an automated egg-sorting system to incre

Question

diltz farms is considering investing in an automated egg-sorting system to increase production for international (web-based) sales of diltz farms products. The new system will cost $3,000 including installation. it will be fully depreciated in 5 yrs. (straight-line) to zero and generate $150 after-tax gain at the end of the projected period (year 6). The initial working capital will be $500 in year one and increase each year thereafter by 5 percent. Revenues generated from the egg-sorter are expected to be $900 in year one, and increase by five percent each year. Expenses are ten percent of revenues. Diltz Farms' opportunity cost of capital is 8.5%. Using the discounted cash-flow analysis, should Diltz Farms invest in the machinery? What is the NPV of the egg-sorter project?

With a required rate of 8.5%, should Diltz Farms go ahead with the new egg-sorter? What is the NPV of the egg-sorter project? What is the IRR of the project?
What is the NPV if the required return is 9%? diltz farms is considering investing in an automated egg-sorting system to increase production for international (web-based) sales of diltz farms products. The new system will cost $3,000 including installation. it will be fully depreciated in 5 yrs. (straight-line) to zero and generate $150 after-tax gain at the end of the projected period (year 6). The initial working capital will be $500 in year one and increase each year thereafter by 5 percent. Revenues generated from the egg-sorter are expected to be $900 in year one, and increase by five percent each year. Expenses are ten percent of revenues. Diltz Farms' opportunity cost of capital is 8.5%. Using the discounted cash-flow analysis, should Diltz Farms invest in the machinery? What is the NPV of the egg-sorter project?

With a required rate of 8.5%, should Diltz Farms go ahead with the new egg-sorter? What is the NPV of the egg-sorter project? What is the IRR of the project?
What is the NPV if the required return is 9%?

With a required rate of 8.5%, should Diltz Farms go ahead with the new egg-sorter? What is the NPV of the egg-sorter project? What is the IRR of the project?
What is the NPV if the required return is 9%?

Explanation / Answer

Solution :

The NPV of the project = -$3000+$5641.025

The NPV of the project = $ 2641.025

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The calculation of IRR using spreadsheet is shown below:

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NPV if required return is 9%

NPV = -$3000+$5548.48

NPV = $ 2548.48

Initial outlay $3,000 Year working capital Revenues Expenses Depreciation per year cash flow = Revenues - expesnes + depreciation Discounted cash flows 1 $500 $900 $590.0 $600 $910.0 838.7096774 2 $525.00 $945.00 $619.5 $600 $925.5 786.1708679 3 $551.25 $992.25 $650.5 $600 $941.8 737.3232744 4 $578.81 $1,041.86 $683.0 $600 $958.9 691.8914241 5 $607.75 $4,006.96 $717.1 $600 $3,889.9 2586.930681 5641.025925

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