Roten Manufacturing Company is considering an investment on a machine for produc
ID: 2783606 • 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.
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?
10.41%
9.04%
11.73%
8.52%
Question 7
What is PI for the project?
1.01
0.98
0.94
1.89
Should Roten accept the project?
No
Yes
a.$2,845.48
b.-$31,469.12
c.$1,653.45
d.-$6,468.34
Question 6
What is IRR for the project?
a.10.41%
b.9.04%
c.11.73%
.8.52%
Question 7
What is PI for the project?
a.1.01
b.0.98
c.0.94
1.89
Should Roten accept the project?
a.No
b.Yes
Explanation / Answer
Sales 140000 Cost of goods sold (35%) 49000 Administrative expenses 15000 Depreciation (250000/5) 50000 Incremental operating income 26000 Tax at 30% 7800 NOPAT 18200 Add: depreciation 50000 OCF 68200 5) NPV: PV of annual operating cash flows = 68200*(1.1^5-1)/(0.1*1.1^5) = $ 258,531.66 PV of NWC recaptured = 15000/1.1^5 = $ 9,313.82 PV of cash inflows $ 267,845.48 Initial investment (250000+15000) $ 265,000.00 NPV $ 2,845.48 Answer: Option [a] $2,845.48 6) IRR is that discount rate for which NPV = 0. Hence, 265000 = 68200*PVIFA(irr,5)+15000*PVIF(irr,5) The value of IRR is to be found out by trial and error. Discounting with 11% NPV = 68200*3.6959+15000*0.59345-265000 = -4037.87 For 10% NPV = $2845.48 For 11% NPV = -$4037.87 So discount rate for 0 NPV lies between 10% and 11% The value of r (IRR) = 10+2845.48/(2845.48+4037.87) = 10.41% Answer: Option [a] 10.41% 7) PI = PV of cash inflows/Initial investment = 267845.48/265000 = 1.01 Answer: Option [a] 1.01 SHOULD ROTEN ACCEPT THE PROJECT---- YES Because NPV is positive, due to which IRR>WACC and PI>1.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.