Roten Manufacturing Company is considering an investment on a machine for produc
ID: 2713235 • Letter: R
Question
Roten Manufacturing Company is considering an investment on a machine for producing auto parts. The machine costs $250,000 today, will have a five-year life and will be depreciated over a five-year life on a straight-line basis toward a zero salvage value. The company paid a consulting company $7,000 last year to help them decide whether there is a sufficient demand for the auto parts. In addition to the investment on the machine, the company also invests $15,000 in net working capital but decides NOT to recoup the net working capital at the end of the fifth year. The company has estimated the performance of the new machine and believes the following are good estimates of the new asset: sales $140,000 per year, cost of goods sold (35% of sales) per year, and administrative expenses $15,000 per year. The company pays interest $20,000 annually on average, has a 10% cost of capital and a 30% tax rate.
Should Roten include the consulting fee, $7,000, in estimating the project's cash flows?
What is the project cash flow at Year 0?
What is the project cash flow at Year 1?
What is the payback period for the project?
What is the NPV for the project?
What is the IRR for the project?
What is the PI for the project?
Should Roten accept the project?
Explanation / Answer
Reject the project
Ans) Machine Cost 250,000 50,000 Sales 140,000 Cost of goods sold (49,000) (140000*0.35) Administation Expenses (15,000) Depreciation (50,000) Interest (20,000) 6,000 Tax 30% 1,800 Profit After tax 4,200 Year Profit After tax Depreciation Profit After Tax & before Depreciation Working Capital/Investment PATBD including Working capital Present value at 10% Present Value of Cash flow Year 0 -265000 1 -265000 Year-1 4200 50000 54200 54200 0.909 49273 Year-2 4200 50000 54200 54200 0.826 44793 Year-3 4200 50000 54200 54200 0.751 40721 Year-4 4200 50000 54200 54200 0.683 37019 Year-5 4200 50000 54200 54200 0.621 33654 -59539 Should Roten include the consulting fee, $7,000, in estimating the project's cash flows? Ans) No, Roten don’t include the consulting fee $7,000 in the estimating project cost because it was already incured. What is the project cash flow at Year 0? Ans) Cash Flow for year 0 $ (265,000) What is the project cash flow at Year 1? Ans) Cash flow at Year 1 49273 What is the payback period for the project? Ans) NPV of the project is negitive so there is not payback period What is the NPV for the project? Ans) NPV of the project $ (59,539) What is the IRR for the project? Ans) The Project IRR is 22% What is the PI for the project? Ans) The PI is negitive Should Roten accept the project? Ans)Reject the project
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