Question

Firm ABC is considering to invest in a project to reduce costs by $70,000 annually. The...

Firm ABC is considering to invest in a project to reduce costs by $70,000 annually. The equipment costs $200,000, had a 4-year life (will be depreciated as a 3-year MACRS asset), requires no additional investment in net working capital, and has a salvage value of $50,000. The firm’s tax rate is 39% and the required return on investments in this risk class is 10%. What is the NPV and IRR of this project? (The MACRS’s first three years’ depreciation rates in order are: 33.33%, 44.44% and 14.82%.)

Please include a step by step breakdown on a calculator due to needing to model this again and excel would not available (TI calculator steps are fine)! Thank you :)

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1
ABC 0 1 2 3 4
MACRS % 33.33% 44.45% 14.81% 7.41%
Investment -$200,000.00
Salvage $ 50,000.00
Savings $ 70,000.00 $ 70,000.00 $ 70,000.00 $ 70,000.00
Depreciation -$ 66,660.00 -$88,900.00 -$29,620.00 -$14,820.00
EBT $    3,340.00 -$18,900.00 $ 40,380.00 $ 55,180.00
Tax (39%) -$    1,302.60 $   7,371.00 -$15,748.20 -$21,520.20
Net Income $    2,037.40 -$11,529.00 $ 24,631.80 $ 33,659.80
Cash Flows -$200,000.00 $ 68,697.40 $ 77,371.00 $ 54,251.80 $ 78,979.80
NPV $ 21,099.60
IRR 14.77%

Depreciation = MACRS% x Investment

Compute Net Income as shown above.

Cash Flows = Investment + Net Income + Depreciation + Salvage x (1 - tax)

Insert these cash flows on a calculator. CF0 = -200,000, CF1 = 68,697.4... CF4 = 78,979.80 and I/Y = 10%

=> Compute NPV = $21,099.60 and IRR = 14.77%

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Cash Flow Estimation: Example 1: You are considering expanding your product line. You feel you can...
Cash Flow Estimation: Example 1: You are considering expanding your product line. You feel you can sell 100,000 of these products per year for 4 years (after which time this project is expected to shut down). The product will sell for $6 each, with variable costs of $3 for each one produced, while annual fixed costs associated with production will be $90,000. In addition, there will be a $200,000 initial expenditure associated with the purchase of new production equipment. It...
Example 1: You are considering expanding your product line. You feel you can sell 100,000 of...
Example 1: You are considering expanding your product line. You feel you can sell 100,000 of these products per year for 4 years (after which time this project is expected to shut down). The product will sell for $6 each, with variable costs of $3 for each one produced, while annual fixed costs associated with production will be $90,000. In addition, there will be a $200,000 initial expenditure associated with the purchase of new production equipment. It assumed that this...
ABC Corporation is considering an expansion project. The proposed project has the following features: The project...
ABC Corporation is considering an expansion project. The proposed project has the following features: The project has an initial cost of $1,000,000 (machine: $800,000, insurance: $40,000, shipping $60,000, modification: $100,000) --this is also the amount which can be depreciated using the following 3 year MACRS depreciation schedule: Year Depreciation Rate 1 33% 2 45% 3 15% 4 7% The sales price and cost are both expected to increase by 4 percent per year due to inflation. If the project is...
Holmes Manufacturing is considering a new machine that costs $240,000 and would reduce pretax manufacturing costs...
Holmes Manufacturing is considering a new machine that costs $240,000 and would reduce pretax manufacturing costs by $90,000 annually. Holmes would use the 3-year MACRS method to depreciate the machine, and management thinks the machine would have a value of $25,000 at the end of its 5-year operating life. The applicable depreciation rates are 33%, 45%, 15%, and 7%. Net operating working capital would increase by $22,000 initially, but it would be recovered at the end of the project's 5-year...
LoRusso Co. is considering replacing an existing piece of equipment. The project involves the following: •...
LoRusso Co. is considering replacing an existing piece of equipment. The project involves the following: • The new equipment will have a cost of $1,800,000, and it is eligible for 100% bonus depreciation so it will be fully depreciated at t = 0. • The old machine was purchased before the new tax law, so it is being depreciated on a straight-line basis. It has a book value of $200,000 (at year 0) and four more years of depreciation left...
All Green Inc.plans a capital project, where it requiresan asset that costs $120,000. It has an...
All Green Inc.plans a capital project, where it requiresan asset that costs $120,000. It has an expectedeconomic life of 3years. The asset will be depreciated using the straight-line method to $0book value.Thecompany expects thatthe assetwill be worth $30,000at the end of the project. Incremental salesare expected to be $100,000, $110,000, and120,000 for year 1 to 3, respectively.Correspondingexpenses are expected to be 50% of the sales.The company will need to invest $12,000 at time=0innet working capital, which will increase $1,000 each...
Price Co. is considering replacing an existing piece of equipment. The project involves the following: •...
Price Co. is considering replacing an existing piece of equipment. The project involves the following: • The new equipment will have a cost of $1,800,000, and it is eligible for 100% bonus depreciation so it will be fully depreciated at t = 0. • The old machine was purchased before the new tax law, so it is being depreciated on a straight-line basis. It has a book value of $200,000 (at year 0) and four more years of depreciation left...
Price Co. is considering replacing an existing piece of equipment. The project involves the following: •...
Price Co. is considering replacing an existing piece of equipment. The project involves the following: • The new equipment will have a cost of $1,800,000, and it is eligible for 100% bonus depreciation so it will be fully depreciated at t = 0. • The old machine was purchased before the new tax law, so it is being depreciated on a straight-line basis. It has a book value of $200,000 (at year 0) and four more years of depreciation left...
Sugar Land Company is considering adding a new line to its product mix, and the capital...
Sugar Land Company is considering adding a new line to its product mix, and the capital budgeting analysis is being conducted by a MBA student. The production line would be set up in unused space (Market Value Zero) in Sugar Land’ main plant. Total cost of the machine is $330,000. The machinery has an economic life of 4 years and will be depreciated using MACRS for 3-year property class. The machine will have a salvage value of $35,000 after 4...
Calculating Project NPV: You have been hired as a consultant for Pristine Urban-Tech Zither, Inc. (PUTZ),...
Calculating Project NPV: You have been hired as a consultant for Pristine Urban-Tech Zither, Inc. (PUTZ), manufacturers of fine zithers. The market for zithers is growing quickly. The company bought some land three years ago for $1.4 million in anticipation of using it as a toxic waste dump site but has recently hired another company to handle all toxic materials. Based on a recent appraisal, the company believes it could sell the land for $1.5 million on an aftertax basis....
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT