• You must show your work step-by-step and explain the procedure that you use to
ID: 2781919 • Letter: #
Question
• You must show your work step-by-step and explain the procedure that you use to find your solutions in writing.
The Masiello Company(MC) is considering a project, which has initial investment in land and machineryof $120,000. This amount contains $70,000 investment in machinery that is subject to five-year MACRS depreciation and $50,000investment in land. The project life issix years andat the end of six years, machinery has no market value but the land will be sold for $50,000. The project will require an additional investment of $55,000 in net working capital(NWC) at the beginning of the project but $25,000 of NWC the will be returned to MC after six years. The project will generate $100,000 higher sales but increases operating costsby $50,000 per year.MC falls into a 40%tax bracket and has a 10 percent cost of capital. MC capital budging guidelines is to use NPV and MIRR to make capital budgeting decision. Should the investment be undertaken? Please justify your decision.
Explanation / Answer
Depreciation = Investment x MACRS(%)
Cash Flows = Net Income + Depreciation + Investment + NWC
NPV and MIRR can be calculated using NPV and MIRR functions in excel
As NPV > 0 and MIRR > cost of capital, the investment should be undertaken.
Procedure used to find the solution-
First of all Net income should be found out by making an income statement based on the data given in the question. After finding the Net income from the Income statement Operating cash flow should be calculated by adding the Depreciation, investment and working capital in Income statement. Once the operating cash flow has been calculated, acsh flow should be used to calculate NPV and MIRR to make a decision.
Note- Kindly upvote the answer if you are satisfied with the response. Thanks.
MC 0 1 2 3 4 5 6 MACRS 20% 32% 19.20% 11.52% 11.52% 5.76% Investment -70,000 NWC -55,000 55,000 Land -50,000 50,000 Sales 100,000 100,000 100,000 100,000 100,000 100,000 Costs -50,000 -50,000 -50,000 -50,000 -50,000 -50,000 Depreciation -14000 -22400 -13440 -8064 -8064 -4032 EBT 36,000 27,600 36,560 41,936 41,936 45,968 Tax (40%) -14400 -11040 -14624 -16774.4 -16774.4 -18387.2 Net Income 21,600 16,560 21,936 25,162 25,162 27,581 Cash Flows -175,000 35,600 38,960 35,376 33,226 33,226 136,613 NPV $36,578.88 MIRR 13.54%Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.