4. Jefferson Products, Inc., is considering purchasing a new automatic press bra

Question

4. Jefferson Products, Inc., is considering purchasing a new automatic press brake, which costs $300,000 including installation and shipping. The machine is expected to generate net cash inflows of $80,000 per year for 10 years. At the end of 10 years, the book value of the machine will be $0 and it is anticipated that the machine will be sold for $100,000. If the press brake project in undertaken, Jefferson will have to increase its net working capital by $75,000. When the project is terminated in 10 years, there will no longer be a need for this incremental working capital and it can be liquidated and made available to Jefferson for other uses. Jefferson requires a 12 percent annual return on this type of project and its marginal tax rate is 40 percent.
a. Calculate the press brake

Explanation / Answer

a. Calculate the press brake’s net present value. NINV = $300,000 + $75,000 = $375,000 NCF1-9 = $80,000 NCF10 = $80,000 + $75,000 + $100,000 (1-.4) = $215,000 NPV = $80,000(PVIFA12, 9) + $215,000(PVIF12,10) -$375,000 = $80,000(5.328) + $215,000(0.322) - $375,000 = $120,470 Please see the attached excel sheet for calculations. The difference between the NPV figures is due to rounding error b. Is the project acceptable? The project is acceptable, because its NPV is positive c. What is the meaning of the computed net present value figure? The value of the firm, and therefore the shareholders’ wealth, is increased by $120,470 as a result of undertaking this project. d. What is the project’s internal rate of return? The IRR of this project is 18.71% using excel e. For the press brake project, at what annual rates of return do the net present value and internal rate of return methods assume that the net cash inflows are being reinvested? The net present value calculation assumes the net cash flows are reinvested at 12%, the project’s required return. The internal rate of return calculation assumes the net cash flows are reinvested at 18.71%, the project

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