1. Your Company is considering an investment project that has the following information: (a) Initial investment (machine one) = $ 15,000,000. (b) The machine one will be depreciated by MACRS 3-year rates. (c) The machine one requires initial net operating working capital of $5,000,000 in year Zero. This amount will increase by $ 2,000,000 in year one and will decrease by $1,000,000 in year two. Accumulated working capital will be fully recovered at the end of year four. (d) The machine One will be dismantled and sold at the end of year four at $ 1,500,000. (e) At the end of year one the company will buy another piece of machine (machine Two) at $ 1,800,000 and will be fully depreciated by the straight line method over two years (year 2 and year 3). The machine Two will be sold at $ 200,000 at the end of year 4. (f) The weighted average cost of capital (WACC) = 18%. (g) Tax rate = 30%. (h) The operating profit (EBIT) of this project is Year EBIT 1 $ 4,000,000 2 6,000,000 3 7,000,000 a. Calculate the Net Present Value, the IRR and the MIRR of this project b. Advise your company to accept or reject this investment.
1. Your Company is considering an investment project that has the following information: (a) Initial investment (machine one) = $ 15,000,000. (b) The machine one will be depreciated by MACRS 3-year rates. (c) The machine one requires initial net operating working capital of $5,000,000 in year Zero. This amount will increase by $ 2,000,000 in year one and will decrease by $1,000,000 in year two. Accumulated working capital will be fully recovered at the end of year four. (d) The machine One will be dismantled and sold at the end of year four at $ 1,500,000. (e) At the end of year one the company will buy another piece of machine (machine Two) at $ 1,800,000 and will be fully depreciated by the straight line method over two years (year 2 and year 3). The machine Two will be sold at $ 200,000 at the end of year 4. (f) The weighted average cost of capital (WACC) = 18%. (g) Tax rate = 30%. (h) The operating profit (EBIT) of this project is Year EBIT 1 $ 4,000,000 2 6,000,000 3 7,000,000 a. Calculate the Net Present Value, the IRR and the MIRR of this project b. Advise your company to accept or reject this investment.
Related questions
Suppose you are thinking to replace an old machine with a new one for your business. The old
machine cost you $100,000, and the new one costs $150,000. The new machine will be
depreciated on a three-year MACRS basis. The new machine has a 5-year life and a salvage
value of zero at the end of this period. The old machine was purchased 5 years ago, and it is being depreciated at the rate of $9,000 per
year. Its book value is $55,000, and its salvage value today is $65,000. You estimate that you
will be able to sell the old machine for $10,000 in 5 years, if you decide to not replace it.
The new machine will save you $50,000 per year. The tax rate is 40%, and the required rate of
return is 10%. Based on the NPV and IRR investment criteria, should you replace the old
machine? Should the cost of the old machine be included in your decision? Why or why
not? Calculate the Initial Investment of the project, and the Terminal Cash Flow of the
project.
This was the Excel format that we were given:
| Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | ||
| Cost Savings | $50,000 | $50,000 | $50,000 | $50,000 | $50,000 | |
| Depreciation New | ||||||
| Depreciation Old | $9,000 | $9,000 | $9,000 | $9,000 | $9,000 | |
| Increm | ||||||
| EBIT | ||||||
| Taxes | ||||||
| NI | ||||||
| Year | Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | Year5 |
| OCF | ||||||
| NCS | ||||||
| Change in NWC | ||||||
| CCFA | ||||||
| NPV | ||||||
| IRR | ||||||
