Mars, Inc. is considering the purchase of a new machine, which will reduce manuf

Question

Mars, Inc. is considering the purchase of a new machine, which will reduce manufacturing costs by $5,000 annually. Mars will use the MACRS (5-year class) method to depreciate the machine, and it expects to sell the machine at the end of its 5-year life for $10,000 (Rates are 0.20, 0.32, 0.19, 0.12, 0.11, 0.06, respectively). The firm expects to be able to REDUCE NET WORKING CAPITAL by $15,000 when the machine is installed. Mars’ marginal tax rate is 40 percent, and it uses a 12 percent cost of capital to evaluate projects of this nature. The machine’s net cost is $60,000. What is the book value of the machine at the end of Year 3? Hint: depreciation schedule needed.

What is the initial net cash flow of the machine (i.e. NCF at t = 0)?
a. -$60,000
b. -$45,000
c. -$75,000
d. None of the above

What is the final net cash flow at t = 5?
a. $5,640
b. $15,640
c. $13,080
d. -$1,920
e. None of the above

What is the NPV of the project?

What is the correct MIRR of the project?
a. 0%
b. –1.22%
c. –16.49%
d. 12%
e. None of the above

Explanation / Answer

1 -$17,400

2 b $-45,000

3 c $13,080

4 NPV $-12,981.84

5 IRR 0%

-60000 Initial Cost Initial Value Rate Depreciation Accumulated Depreciation Book Value 15000 NWCReduction 60000 20 12000 12000 48000 10000 Salvage value 0 -45000 Initial NCF 60000 32 19200 31200 28800 1 7800 60000 19 11400 42600 17400 40% Tax 2 10680 60000 12 7200 49800 10200 12% cost of capital 3 7560 60000 11 6600 56400 3600 60000 4 5880 60000 6 3600 60000 0 5 13080 NPV -12981.84 Year cost saving Depreciation Total Tax After Tax add back depreciation B4+NPV(12%,B5:B9) 1 5000 12000 -7000 -2800 -4200 7800 2 5000 19200 -14200 -5680 -8520 10680 IRR 0.00% 3 5000 11400 -6400 -2560 -3840 7560 4 5000 7200 -2200 -880 -1320 5880 5 5000 6600 -1600 -640 -960 5640 5 Salvage value after tax 7440 13080

Related Questions

Navigate

• Browse (All)
• Browse M
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.