Topic 5 (20 points) The CEO of Midwest Manufacturing Company has asked for your
ID: 2735815 • Letter: T
Question
Topic 5 (20 points)
The CEO of Midwest Manufacturing Company has asked for your analysis of and recommendation related to the proposed acquisition of an additional stamping machine for its principal manufacturing plant. Demand for the company’s products has risen to a level that exceeds its present productive capacity. An additional stamping machine will make it possible for the company to increase its production and sales by 15 percent, resulting in projected incremental relevant cash flows (after income taxes and the tax benefits of the “depreciation tax shield”) in each of the next five years, as indicated at right:
Year
Projected incremental cash flows
1
$40,000
2
30,000
3
40,000
4
50,000
5
20,000
Total
$180,000
The equipment will cost $150,000 to purchase and install. Management estimates that its economic life will be five years, after which it will have no residual value. The company’s required rate of return on new investments (cost of capital) is 14.0 percent (or, 0.14).
Complete the NPV analysis of the stamping machine proposal, below. Regard all incremental relevant cash flows as “risky” and assume they occur at the end of years indicated, as listed above.
State your recommendation to the CEO, including the basis for it. Limit the length of your response to 50 words.
Complete the NPV analysis of the stamping machine proposal:
Year (n)
Relevant cash flow
Discount factor
Discounted cash flows
“Time zero”
1
2
3
4
5
State your recommendation to the CEO, including the basis for it. Limit the length of your response to 50 words.
Replace this text with your response
The CEO of Midwest Manufacturing Company has asked for your analysis of and recommendation related to the proposed acquisition of an additional stamping machine for its principal manufacturing plant. Demand for the company’s products has risen to a level that exceeds its present productive capacity. An additional stamping machine will make it possible for the company to increase its production and sales by 15 percent, resulting in projected incremental relevant cash flows (after income taxes and the tax benefits of the “depreciation tax shield”) in each of the next five years, as indicated at right:
Year
Projected incremental cash flows
1
$40,000
2
30,000
3
40,000
4
50,000
5
20,000
Total
$180,000
Explanation / Answer
Complete the NPV analysis of the stamping machine proposal: Year (n) Relevant cash flow Discount factor Discounted cash flows “Time zero” -150000 1.0000 -150000 1 40000 0.8772 35088 2 30000 0.7695 23084 3 40000 0.6750 26999 4 50000 0.5921 29604 5 20000 0.5194 10387 NPV -24838 NPV = -$24,838 Recommendation: The proposal to instal the new stamping machine is to be rejected as it has a negative NPV, which means that if the project is implemented the shareholders' wealth would be reduced by $24838 in present value terms.
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.