A proposed investment has an equipment cost of $1,380,800. The cost will be depr

Question

A proposed investment has an equipment cost of $1,380,800. The cost will be depreciated straight-line to a zero salvage value over its 15 year life. The firm will also use their existing, but currently unused, equipment that has been fully depreciated but has a market value of $37,000. Cash sales will be $223,690 per year and variable costs will run $98,469 per year. Fixed cost is $56,400 per year. The firm will also need to invest $45,331 in net working capital. Marketing research for this project was $46,500 last year and on-going marketing ads will cost $7,000 per year. The appropriate discount rate is 7.4%, and the corporate marginal tax rate is 33% while the average tax rate is 36%. Please use the Marginal tax.

            (A.) What are the cash flows for the project?   

(B.) What is the NPV of this project?

(C.) What is the Payback Period?

(D.) What is the Profitability Index?

(E.) What is the IRR?

(F.) Should you accept or reject this project? Assume the payback cutoff is 4 years.

Explanation / Answer

Please provide feedback... Thanks in advance.. :-)

1 Years 0 1 to 15 15 Initial Investment -1380800 Working Capital -45331 45331 Sales 223690 Variable Cost 98469 Fixed Cost 56400 Advertising Cost 7000 Depreciation (1380800/15) 92053.33333 Earnings before taxes -30232.33333 less tax saving -9976.67 Net Loss -20255.66333 Depreciation 92053.33333 Cash flow after taxes $ -1426131 71797.67 45331 cash flows initial operational terminal Research cost is incurred already and is therefore sunk. Market value of old equipment i.e. 37000 is opportunity cost, but since it is a non cash cost it is ignored Working capital is assumed to be recovered at the end of the project 2 Calculation of NPV 0 1 to 15 15 Total CFAT -1426131 71797.67 45331 PV Factor @ 7.4% 1 8.8822 0.3427 Present value -1426131 637721.3574 15535.7090 -772874 3 Payback Period Initial investment/Annual cash flows 1426131/71797.67 19.86319 4 Profitability Index Pv of cash inflows/ initial investments 637721.35+15535.71/1426121 0.458062 5 IRR Outflow = Inflow 1426131= 71797.67 x PVAF(r,15) + 45331 x PVIF(r,15) r NPV 0% -303835 r 0 -5% 215572.3 Using Linear Interpolation r-0/-5-0=0-(-303835)/215572.3-(-303835) r= - 2.9248% 6 Project should be rejected Reasons - negative NPV,Negative IRR, Payback period Beyond life of project, PI less then 1

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

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