1. Calculate the project’s NPV, IRR, MIRR and Payback period. Should the project
ID: 2734961 • Letter: 1
Question
1. Calculate the project’s NPV, IRR, MIRR and Payback period. Should the project be accepted?
The background to these question is: .
After several months, they felt Central should go ahead with the project. They would set up production in an unused section of their main plant. New machinery with an estimated cost of $2,100,000 would be purchased. Shipping would cost $150,000 and there would be an additional charge of the same amount for installation. Inventories would increase by $75,000 and receivables would increase by $125,000. The machinery was estimated to have a useful life of four years. Depreciation would be on the Modified Accelerated Cost Recovery System (MACRS) with allowances of 33%, 45%, 15% and 7% for the four years of its useful life. The machinery is expected to be sold after four years for $150,000. The company had been thinking about leasing the unused portion of the factory that is scheduled to be used for the new project. They had received several interesting offers, the most favorable of which was for $20,000 per year. Annual sales of the new product were estimated to be 150,000 cases at $35 per case. Costs, excluding depreciation, would be 80% of sales. It was felt that existing sales would be cannibalized by $20,000 per year.
Explanation / Answer
dep rate dep cost of machine 2100000 cost of machine 2100000 33% 2400000 792000 shipping charges 150000 shipping charges 150000 45% 2400000 1080000 installation charges 150000 installation charges 150000 15% 2400000 360000 additional working capital 200000 cost of machine 2400000 7% 2400000 168000 cash outflow 2600000 sales 150000 35 5250000 lease rent received 20000 v.cost 80% 4200000 decrease in sales 20000 20000 contribution 1050000 No tax rate is given so it is considered that contribution is earning after tax before depreciation. And no required rate of return is given so it is assumed that rate is 10% contribution present value @10% 0 -2600000 1 1050000 0.909091 954545.5 2 1050000 0.826446 867768.6 3 1050000 0.751315 788880.5 4 1050000 0.683013 717164.1 150000 0.683013 102452 200000 0.683013 136602.7 present value of cash flow 3567413 cash outflow 2600000 NPV 967413.4 IRR 25% MIRR 16% Payback period 2.47619 Years
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