Graziano Corporation (GC) is considering a project to purchase new equipment. The equipment would be depreciated...
Graziano Corporation (GC) is considering a project to purchase 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 an investment of $6,000 today on net working capital. 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 its pre-tax annual cash flows of $5,000 per year. The investment on the project costs $76,000 today plus $4,000 installation cost. The project generates sales revenues of $67,500 each year for 3 years. The annual operating costs of the project is $25,000, excluding depreciation. GC has a weighted average cost of capital 11.00% and its tax rate is 35 percent. The company can sell the equipment at the end of the third year to generate $10,000 after-tax cash flow. What is the project's MIRR and NPV (you must show steps)?
Homework Answers
| NPV | 63463.48 |
| MIRR | 33.46% |
Workings
| Year |
Cost of new machine |
NWC |
Tax shield- depreciation |
Sale of new machine |
(Sales-lost revenue-cost) after tax |
Net CF |
| 0 | -80000 | -6000 | -86000 | |||
| 1 | 32000 | 24375 | 56375 | |||
| 2 | 32000 | 24375 | 56375 | |||
| 3 | 6000 | 32000 | 10000 | 24375 | 72375 |
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