Roten Manufacturing Company is considering an investment on a machine for produc

Question

Roten Manufacturing Company is considering an investment on a machine for producing auto parts. The machine costs $250,000 today, will have a five-year life and will be depreciated over a five-year life on a straight-line basis toward a zero salvage value. The company paid a consulting company $7,000 last year to help them decide whether there is a sufficient demand for the auto parts. In addition to the investment on the machine, the company also invests $15,000 in net working capital. The company has estimated the performance of the new machine and believes the following are good estimates of the new asset: sales $140,000 per year, cost of goods sold (35% of sales) per year, and administrative expenses $15,000 per year. The company pays interest $20,000 annually on average, has a 10% cost of capital and a 30% tax rate. Answer Questions 1 - 8. Should Roten include consulting fee, $7,000, in estimating project's cash flows?

Yes

No

QUESTION 2

What is the project cash flow at Year 0?

-$265,000

-$15,000

-$250,000

-$203,000

QUESTION 3

What is the project cash flow at Year 5?

$83,200

$74,000

$68,200

$50,500

QUESTION 4

What is payback period for the project?

3.78 years

4.02 years

4.51 years

3.89 years

QUESTION 5

What is NPV for the project?

$2,845.48

-$31,469.12

$1,653.45

-$6,468.34

QUESTION 6

What is IRR for the project?

8.52%

10.41%

11.73%

9.04%

QUESTION 7

What is PI for the project?

0.94

1.89

0.98

1.01

QUESTION 8

Should Roten accept the project?

Yes

No

Explanation / Answer

1) Roten Should not include Consulting Fees of $ 7000 in estimating cash flows. i.e Answer is NO 2) Initial Outlflow $ Cost of Equipment        2,50,000 Working Capital            15,000 Initial Outflow        2,65,000 3) Cash flow at year 5 $ Sales 140000 Less:- Cost of Goods Sold -49000 Less:- Administration Exp -15000 Less:- Interest -20000 Less:- Depreciation -50000              6,000 Less:- Income tax @ 30%              1,800 Profit after tax              4,200 PAT 4200 Add:- Dep 50000 54200 Add:- Working capital 15000 Cash flow at year 5' 69200

Related Questions

Navigate

• Browse (All)
• Browse R
• Subjects

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