Your firm is considering the purchase of a new piece of equipment that would cos
ID: 2799986 • Letter: Y
Question
Your firm is considering the purchase of a new piece of equipment that would cost $250,000. This piece of equipment will be used on a short term (4 year) project. The equipment will be depreciated straight-line to zero over its four year life and you will be able to sell the piece of equipment for $40,000 at the end of the project. You will save $110,000 before taxes per year by purchasing the piece of equipment and you will be able to reduce working capital by $50,000. Assume a tax rate of 35% (HINT: Use the tax-shield approach to calculate the OCF) If the required return on the project is 13%, what is the NPV of this project? (Please format your answer as $XX,XXX.XX) What is the IRR of the project? (Please format your answer as XX.XX%) Should you accept or reject the purchase of this piece of equipment? (Please write either “Accept” or “Reject.”)
Explanation / Answer
Year Capital flow Red. in W.C. Inflow Depn EBT Tax 35% PAT OCF FCF Disc Fact Disc Cash Flow 0 -2,50,000 -250000 1 -2,50,000.00 1 50,000 1,10,000 52,500 57,500 20,125 37,375 89,875 139875 0.884956 1,23,783.19 2 1,10,000 52,500 57,500 20,125 37,375 89,875 89875 0.783147 70,385.31 3 1,10,000 52,500 57,500 20,125 37,375 89,875 89875 0.69305 62,287.88 4 40,000 -50,000 1,10,000 52,500 57,500 20,125 37,375 89,875 79875 0.613319 48,988.83 NPV 55,445.21 Assume after 5th Year working capital of 50000 required IRR 24.54%
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.