Please provide step by step calculations. Your firm is considering a new three-y
ID: 2614879 • Letter: P
Question
Please provide step by step calculations.
Your firm is considering a new three-year project with unit sales expected to be 10,000 per year. They expect the unit sale price to be $15 with variable costs accounting for $8.25 per unit. Fixed costs are estimated to be S15,500 per year. The project will require the purchase of a new piece of equipment which costs $150,000 with an additional $22,000 in shipping and installation costs. The equipment will be depreciated straight-line to zero over four years. Further, the project will require an additional investment in net working capital of $25,000. It is expected to have an estimated salvage value of $50,000 at the end of the project in three years. If the firm is in the 35% tax bracket and the cost of capital is 18%, is the project acceptable according to NPV and IRR? Justify your acceptance/rejection. a. b. C. d. Determine the amount of NCS for each year including the amount of the initial investment. Determine the amount of the annual depreciation and OCFs for each year. Determine the NCFs (C FFAs) for each year. Determine the NPV, IRR.Explanation / Answer
Intitial investment = cost of machine + installation cost + net working capital
Net cash outflow for year 0 = 150,000 + 22,000 + 25,000
Net cash outflow for year 0 = 197,000
Annual depreciation = 172,000 / 4 = 43,000
Operating cash flow from year 1 to year 3 = (sales - variable costs - fixed costs - depreciation)( 1 - tax) + depreciation
Operating cash flow from year 1 to year 3 = [(10,000 * 15) - ( 10,000 * 8.25) - 15,500 - 43,000]( 1 - 0.35) + 43,000
Operating cash flow from year 1 to year 3 = [ 150,000 - 82,500 - 15,500 - 43,000]( 0.65) + 43,000
Operating cash flow from year 1 to year 3 = $48,850
Terminal year cash flow = sale of equipment + net working capital - tax(sale price - book value)
The book value at the end of three years will be = 172,000 - ( 43,000 * 3) = 43,000
Non-operating cash flow, cash flow at year 3 = 50,000 + 25,000 - 0.35(50,000 - 43,000)
Non-operating cash flow, cash flow at year 3 = 50,000 + 25,000 - 2,450
Non-operating cash flow, cash flow at year 3 = 72,550
Total year three cash flow = 72,550 + 48,850 = 121,400
NPV = present value of cash inflows - oresent value of cash outflows
NPV = -197,000 + 48,850 / ( 1 + 0.18)1 + 48,850 / ( 1 + 0.18)2 + 121,400 / ( 1 + 0.18)3
NPV = -46,630.6
IRR is the rate of return that makes NPV equal to 0
-197,000 + 48,850 / ( 1 + R)1 + 48,850 / ( 1 + R)2 + 121,400 / ( 1 + R)3 = 0
Using trial and error method, i.e, after trying various values for R, lets try 4.7%
-197,000 + 48,850 / ( 1 + 0.047)1 + 48,850 / ( 1 + 0.047)2 + 121,400 / ( 1 + 0.047)3 = 0
0 = 0
Therefore, IRR is 4.7%
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