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.

QUESTION 5

What is NPV for the project?

$1,653.45

-$31,469.12

$2,845.48

-$6,468.34

2 points   

QUESTION 6

What is IRR for the project?

11.73%

10.41%

9.04%

8.52%

1 points   

QUESTION 7

What is PI for the project?

1.01

1.89

0.94

0.98

1 points   

QUESTION 8

Should Roten accept the project?

Yes

No

a.

$1,653.45

b.

-$31,469.12

c.

$2,845.48

d.

-$6,468.34

Explanation / Answer

5. c . 2845.48

6.b. IRR = 10.41%

7. a.1.01

PI = PV of cash inflows / PV of cash outflows

= 267845 / 265000

=1.01

8. a.Yes Roten should accept the project as it has a positive NPV and a PI > 1.

Please hit the like button if the answer helped you else leave a comment for further clarification. Thank you! All the best!

Year Cashflow PV 0 -265000 -265000 1 68200 62000 2 68200 56363.6 3 68200 51239.7 4 68200 46581.5 5 83200 51660.7 NPV 2845.48

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