Thornley Machines is considering a 3-year project with an initial cost of $960,0

Question

Thornley Machines is considering a 3-year project with an initial cost of $960,000. The project will not directly produce any sales but will reduce operating costs by $500,000 a year. The equipment is depreciated straight-line to a zero book value over the life of the project. At the end of the project the equipment will be sold for an estimated $143,000. The tax rate is 34 percent. The project will require $26,000 in extra inventory for spare parts and accessories. Should this project be implemented if Thornley's requires a rate of return of 14 percent? Why or why not?

Thornley Machines is considering a 3-year project with an initial cost of $960,000. The project will not directly produce any sales but will reduce operating costs by $500,000 a year. The equipment is depreciated straight-line to a zero book value over the life of the project. At the end of the project the equipment will be sold for an estimated $143,000. The tax rate is 34 percent. The project will require $26,000 in extra inventory for spare parts and accessories. Should this project be implemented if Thornley's requires a rate of return of 14 percent? Why or why not?

Explanation / Answer

Hi,

Please find the answer as follows:

Initial Cash Flow = -960000 - 26000 = -986000

Operating Cash Flow = 500000*(1-.34) + (960000/3)*.34 = 438800

Final Cash Flow =

NPV = -960000 - 26000 + 438800/(1+.14)^1 + 438800/(1+.14)^2 + 438800/(1+.14)^3 + 143000*(1-.34)/(1+.14)^3 + 26000/(1+.14)^3 = 113985.2

Yes, the project should be accepted as it results in a + NPV.

Thanks.

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.