As a Financial analyst, you must evaluate a proposed project to produce printer

Question

As a Financial analyst, you must evaluate a proposed project to produce printer cartridges. The equipment would cost $55,000, plus 10,000 for installation. Annual sales would be 4,000 units at a price of $50 per cartridge, and the projects life would be 3 years. Current assets would increase by $5,000 and Payables by $3,000. At the end of 3 years, the equipment could be sold for $10,000. Depreciation would be based on the MACRS 3 year class; so the applicable rates would be 33%, 45%, 15%, and 7%. Variable cost would be 70% of sales revenue, fixed cost excluding depreciation would be $30,000 per year. The marginal tax rate is 40%. The corporate WACC is 11%.

A. What is the required investment, the year 0 project cash flow?

B. What are the annual deprecation charges?

C. What are the projects annual net cash flows?

D. What is the NPV?

E. What is the IRR?

F. Would you accept the project?

Explanation / Answer

A. the year 0 project cash flow = $55,000 + $10,000 = $65,000 B. Depreciation rate = 33%, 45%, 15%, and 7% Annual depreciation charges Year 1 Year 2 Year 3 33%*$55,000, 45%*$55,000, 15%*$55,000 18150 24750 8250 C. Year 1 Year 2 Year 3 Revenue 200,000 200,000 200,000

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