Roten Manufacturing Company is considering an investment on a machine for produc

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. 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. Answer Questions 1 - 8.

QUESTION 3

What is the project cash flow at Year 5?

$74,000

$83,200

$50,500

$68,200

2 points   

QUESTION 4

What is payback period for the project?

4.02 years

4.51 years

3.78 years

3.89 years

1 points   

QUESTION 5

What is NPV for the project?

$2,845.48

-$31,469.12

-$6,468.34

$1,653.45

2 points   

QUESTION 6

What is IRR for the project?

10.41%

11.73%

8.52%

9.04%

1 points   

QUESTION 7

What is PI for the project?

1.01

0.94

1.89

0.98

1 points   

QUESTION 8

Should Roten accept the project?

No

Yes

$74,000

$83,200

$50,500

$68,200

Explanation / Answer

3.The project cash flow at Year.

C.50,500

4. Payback period for the project is

D.3.89 years

5. NPV for the project is

D.$1,653.45

6.IRR for the project is

C.8.52%

7.PI for the project is

D.0.98

8.Yes.Roten should accept the project.

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