Roten Manufacturing Company is considering an investment on a machine for produc
ID: 2763235 • Letter: R
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? a. Yes b. No 1 points Saved QUESTION 2 What is the project cash flow at Year 0? a. -$265,000 b. -$15,000 c. -$250,000 d. -$203,000 1 points Saved QUESTION 3 What is the project cash flow at Year 5? a. $83,200 b. $74,000 c. $68,200 d. $50,500 2 points Save Answer QUESTION 4 What is payback period for the project? a. 3.78 years b. 4.02 years c. 4.51 years d. 3.89 years 1 points Save Answer QUESTION 5 What is NPV for the project? a. $2,845.48 b. -$31,469.12 c. $1,653.45 d. -$6,468.34 2 points Save Answer QUESTION 6 What is IRR for the project? a. 8.52% b. 10.41% c. 11.73% d. 9.04% 1 points Save Answer QUESTION 7 What is PI for the project? a. 0.94 b. 1.89 c. 0.98 d. 1.01 1 points Save Answer QUESTION 8 Should Roten accept the project? a. No b. Yes
Explanation / Answer
The answer of the question depends on whether the NWC is assumed to be returned at the end of 5 years. As nothing mentioned clearly, we assume that the NWC is not refunded at the end of the project. If it is considered refunded results will be different. Roten Maufacturing Details Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Machine cost (250,000) NWC investment (15,000) Sales 140,000 140,000 140,000 140,000 140,000 COGS -35% od sales (49,000) (49,000) (49,000) (49,000) (49,000) Admin Expenses (15,000) (15,000) (15,000) (15,000) (15,000) Depreciation (50,000) (50,000) (50,000) (50,000) (50,000) Net Taxable income 26,000 26,000 26,000 26,000 26,000 Tax @30% (7,800) (7,800) (7,800) (7,800) (7,800) Post Tax Income 18,200 18,200 18,200 18,200 18,200 Add Back depreciation 50,000 50,000 50,000 50,000 50,000 Net Cash flow 68,200 68,200 68,200 68,200 68,200 PV factor @10% 1 0.909 0.826 0.751 0.683 0.621 PV of Cash flows (265,000) 62,000 56,364 51,240 46,582 42,347 NPV = $ (6,468.34) PV of Cash Inflows = 258,532 1 Roten Should NOT include the consulting fee in estimating projects cash flow 2 Project's cash flow in Year 1 is =-$265,000 3 Project's Cash flow in Year 5 =$68,200 4 Payback period is 3.89 years 5 NPV of the project is -$6486.34 IRR calculation Roten Maufacturing Details Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Machine cost (250,000) NWC investment (15,000) Sales 140,000 140,000 140,000 140,000 140,000 COGS -35% od sales (49,000) (49,000) (49,000) (49,000) (49,000) Admin Expenses (15,000) (15,000) (15,000) (15,000) (15,000) Depreciation (50,000) (50,000) (50,000) (50,000) (50,000) Net Taxable income 26,000 26,000 26,000 26,000 26,000 Tax @30% (7,800) (7,800) (7,800) (7,800) (7,800) Post Tax Income 18,200 18,200 18,200 18,200 18,200 Add Back depreciation 50,000 50,000 50,000 50,000 50,000 Net Cash flow 68,200 68,200 68,200 68,200 68,200 PV factor @9.04% 1 0.917 0.841 0.771 0.707 0.649 PV of Cash flows (265,000) 62,546 57,360 52,605 48,244 44,244 NPV = $ (0.88) 6 IRR of the Project is 9.04% 7 AS the NPV is negative and IRR below cost of capital , the project should not be accepted.
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