Alessandro Florenzi Company (AFC) is considering a project to purchase a new equ
ID: 2800143 • Letter: A
Question
Alessandro Florenzi Company (AFC) is considering a project to purchase a new equipment. The equipment would be depreciated by the straight-line method over its 3-year life and would have a zero-salvage value. The project requires investment of $6,000 today on net working capital, which will be recovered at the end of the third year when project is closed. Revenues and other operating costs are expected to be constant over the project's 3-year life. However, this project would compete with other company’s products and would reduce their pre-tax annual cash flows. The company can sell the equipment at the end of third year to generate $10,000 after tax cash flow. What is the project's MIRR?
Other information relevant to this project: WACC 11.0%
Pre-tax cash flow reduction for other products -$5,000 I
nvestment cost (depreciable basis) $80,000
Straight-line deprec. rate 33.333%
Sales revenues, each year for 3 years $67,500
Annual operating costs (excl. depreciation.) -$25,000
Tax rate 35.0%
Explanation / Answer
Total Investment = 80000
Life = 3 years
Depreciation = 80000*33.33% = 26667 per year
Tax saving on dep= 26667*35% = 9333 per year
Sales (net of Tax) = 67500 (1-.35) = 43875
Operating cost (net of tax) 25000 (1-.35) = 16250
Cash flow reduction
WACC=11%
Sum of PVF @11% for 3 years = 2.444
Reduction in other product revenue (net of tax) 5000(1-.35) = 3250
Statement showing NPV:
Particular
Time
PVF @ 11%
Amount
Present Value
Cost Of Plant
0
1
-80000
-80000
working Capital
0
1
-6000
-6000
Sales (Net of Tax)
1 to 3
2.44
43875
107055
Operating Cost (net of Tax)
1 to 3
2.44
-16250
-39650
Saving on Dep
1 to 3
2.44
9333
22772.52
CashFlow reductin for other products (net of tax)
1 to 3
2.44
-3250
-7930
Salvage
3
0.731
10000
7310
working Capital released
3
0.731
6000
4386
Net present Value
7943.52
Purchase the equipment
Thanks
Particular
Time
PVF @ 11%
Amount
Present Value
Cost Of Plant
0
1
-80000
-80000
working Capital
0
1
-6000
-6000
Sales (Net of Tax)
1 to 3
2.44
43875
107055
Operating Cost (net of Tax)
1 to 3
2.44
-16250
-39650
Saving on Dep
1 to 3
2.44
9333
22772.52
CashFlow reductin for other products (net of tax)
1 to 3
2.44
-3250
-7930
Salvage
3
0.731
10000
7310
working Capital released
3
0.731
6000
4386
Net present Value
7943.52
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