I NEED DETAILED EXPLANATIONS FOR THE FOLLOWING QUESTION. DO NOT SKIP ANY STEPS/P
ID: 2781992 • Letter: I
Question
I NEED DETAILED EXPLANATIONS FOR THE FOLLOWING QUESTION. DO NOT SKIP ANY STEPS/PARTS
The Masiello Company(MC) is considering a project, which has initial investment in land and machinery of $120,000. This amount contains $70,000 investment in machinery that is subject to five-year MACRS depreciation and $50,000 investment in land. The project life is six years and at the end of six years, machinery has no market value but the land will be sold for $50,000.
The project will require an additional investment of $55,000 in net working capital(NWC) at the beginning of the project but $25,000 of NWC the will be returned to MC after six years.
The project will generate $100,000 higher sales but increases operating costs by $50,000 per year. MC falls into a 40% tax bracket and has a 10 percent cost of capital. MC capital budging guidelines is to use NPV and MIRR to make capital budgeting decision. Should the investment be undertaken? Please justify your decision.
Explanation / Answer
Here, Depreciation = Investment x MACRS(%)
Cash Flows = Net Income + Depreciation + Investment + NWC
NPV and MIRR can be calculated using NPV and MIRR functions in excel
As NPV > 0 and MIRR > cost of capital, the investment should be undertaken.
MC 0 1 2 3 4 5 6 MACRS 20% 32% 19.20% 11.52% 11.52% 5.76% Investment -70,000 NWC -55,000 55,000 Land -50,000 50,000 Sales 100,000 100,000 100,000 100,000 100,000 100,000 Costs -50,000 -50,000 -50,000 -50,000 -50,000 -50,000 Depreciation -14000 -22400 -13440 -8064 -8064 -4032 EBT 36,000 27,600 36,560 41,936 41,936 45,968 Tax (40%) -14400 -11040 -14624 -16774.4 -16774.4 -18387.2 Net Income 21,600 16,560 21,936 25,162 25,162 27,581 Cash Flows -175,000 35,600 38,960 35,376 33,226 33,226 136,613 NPV $36,578.88 MIRR 13.54%Related Questions
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