Texas Roks, Inc. is considering a new quarry machine. The costs and revenues ass
ID: 2700870 • Letter: T
Question
Texas Roks, Inc. is considering a new quarry machine. The costs and revenues associated with the machine have been provided to you for analysis:
Cost of the new project
$4,000,000
Installation costs
$100,000
Estimated unit sales in year 1
50,000
Estimated unit sales in year 2
75,000
Estimated unit sales in year 3
40,000
Estimated sales price in year 1
$150
Estimated sales price in year 2
$175
Estimated sales price in year 3
$160
Variable cost per unit
$120
Annual fixed cost
$50,000
Additional working capital needed
$435,000
Depreciation method
3 years straight-line method, no salvage value
Texas Rok's tax rate
40%
Texas Rok's cost of capital
13%
Required:
Deliverables:
Cost of the new project
$4,000,000
Installation costs
$100,000
Estimated unit sales in year 1
50,000
Estimated unit sales in year 2
75,000
Estimated unit sales in year 3
40,000
Estimated sales price in year 1
$150
Estimated sales price in year 2
$175
Estimated sales price in year 3
$160
Variable cost per unit
$120
Annual fixed cost
$50,000
Additional working capital needed
$435,000
Depreciation method
3 years straight-line method, no salvage value
Texas Rok's tax rate
40%
Texas Rok's cost of capital
13%
Explanation / Answer
1. operating cash flow= 1 2 3 sales 7500000 13125000 6400000 Less: Variale cost 6000000 9000000 4800000 Fixed cost 50000 50000 50000 Depreciation 1366667 1366667 1366667 cash flow 83333 2708333 183333 Less tax 33333.2 1083333.2 73333.2 cash flow 49999.8 1624999.8 109999.8 net cash flow 1416666.8 2991666.8 1476666.8 2.NPV 1 2 3 Net inflow 1416666.8*0.885 2991666.8 *.783 1476666.8*.693 Total inflow =year 1 +year2+year3 4619555 NPV=4619555.3148-4535000=84555 IRR 14.08% 3. accept the project..Because NPV is positive 4. accept the poroject.. Because IRR is more than company's cost of capital.. 5. finally accept the project.because NPV is positive and also IRR is also more than cost of capital 6.pabyback period= cumulative inflows 1. 1416666.8 2. 4408333.6 3. 5885000.4 payback=2 year+[(4535000-4408333.6)/1476666.8]*12=2year 1 month no..
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