Read Book Company is the manufacturer of exercise machines and is considering producing a new line of equipment in an effort to increase its market share. The new production line will cost $850,000 for manufacturing the parts and an additional $280,000 is needed for installation. The equipment falls into the MACRS 3-yr class, and would be sold after four years for $350,000. The equipment line will generate additional annual revenues of $600,000, and will have additional annual operating expenses of $300,000. An inventory investment of $75,000 is required during the life of the project. Read Book Company is in the 25 percent tax bracket, and its existing cost of capital is 8 percent. a. Calculate the initial outlay of the project b. Calculate the annual after-tax operating cash flow for Years 1 -4. c. Determine the terminal year non-operating cash flow in year 4: d. What is the equipment NPV? e. What is the estimated Internal Rate of Return (IRR) of the equipment? f. Should the equipment be accepted based on the IRR criterion?
| Read Book | 0 | 1 | 2 | 3 | 4 |
| MACRS % | 0.3333 | 0.4445 | 0.1481 | 0.0741 | |
| Investment | -1,130,000 | ||||
| Salvage | 350,000 | ||||
| NWC | -75,000 | 75,000 | |||
| Revenues | 600,000 | 600,000 | 600,000 | 600,000 | |
| Expenses | -300,000 | -300,000 | -300,000 | -300,000 | |
| Depreciation | -376,629 | -502,285 | -167,353 | -83,733 | |
| EBT | -76,629 | -202,285 | 132,647 | 216,267 | |
| Tax (25%) | 19,157 | 50,571 | -33,162 | -54,067 | |
| Profits | -57,472 | -151,714 | 99,485 | 162,200 | |
| OCF | 319,157 | 350,571 | 266,838 | 245,933 | |
| Cash Flows | -1,205,000 | 319,157 | 350,571 | 266,838 | 583,433 |
| NPV | $31,740 | ||||
| IRR | 9.08% | ||||
Depreciation = MACRS % x Investment
OCF = Profits + Depreciation
Cash Flows = Investment + NWC + Salvage x (1 - tax) + Profits + Depreciation
NPV and IRR can be calculated using the same function in excel.
Equipment should be accepted as its IRR > 9%
Read Book Company is the manufacturer of exercise machines and is considering producing a new line...
Read Book Company is the manufacturer of exercise machines and is considering producing a new line of equipment in an effort to increase its market share. The new production line will cost $850,000 for manufacturing the parts and an additional $280,000 is needed for installation. The equipment falls into the MACRS 3-yr class, and would be sold after four years for $350,000. The equipment line will generate additional annual revenues of $600,000, and will have additional annual operating expenses of...
Read Book Company is the manufacturer of exercise machines and is considering producing a new line of equipment in an effort to increase its market share. The new production line will cost $850,000 for manufacturing the parts and an additional $280,000 is needed for installation. The equipment falls into the MACRS 3-yr class, and would be sold after four years for $350,000. The equipment line will generate additional annual revenues of $600,000, and will have additional annual operating expenses of...
2. Read Book Company is the manufacturer of exercise machines and is considering producing a new line of equipment in an effort to increase its market share. The new production line will cost $850,000 for manufacturing the parts and an additional $280,000 is needed for installation. The equipment falls into the MACRS 3-yr class, and would be sold after four years for $350,000. The equipment line will generate additional annual revenues of $600,000, and will have additional annual operating expenses...
Read Book Company is the manufacturer of exercise machines and is considering producing a new line of equipment in an effort to increase its market share. The new production line will cost $850,000 for manufacturing the parts and an additional $280,000 is needed for installation. The equipment falls into the MACRS 3-yr class and would be sold after four years for $350,000. The equipment line will generate additional annual revenues of $600,000 and will have additional annual operating expenses of...
PLEASE BE DETAILED WITH ANSWER Read Book Company is the manufacturer of exercise machines and is considering producing a new line of equipment in an effort to increase its market share. The new production line will cost $850,000 for manufacturing the parts and an additional $280,000 is needed for installation. The equipment falls into the MACRS 3-yr class, and would be sold after four years for $350,000. The equipment line will generate additional annual revenues of $600,000, and will have...
Read Book Company is the manufacturer of exercise machines and is considering producing a new line of equipment in an effort to increase its market share. The new production line will cost $850,000 for manufacturing the parts and an additional $280,000 is needed for installation. The equipment falls into the MACRS 3‐yr class, and would be sold after four years for $350,000. The equipment line will generate additional annual revenues of $600,000, and will have additional annual operating expenses of...
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