Alessandro Florenzi Company (AFC) is considering a project to purchase a new equ

Question

Alessandro Florenzi Company (AFC) is considering a project to purchase a new equipment. The equipment would be depreciated by the straight-line method over its 3-year life and would have a zero-salvage value. The project requires investment of $6,000 today on net working capital, which will be recovered at the end of the third year when project is closed. Revenues and other operating costs are expected to be constant over the project's 3-year life. However, this project would compete with other company’s products and would reduce their pre-tax annual cash flows. The company can sell the equipment at the end of third year to generate $10,000 after tax cash flow. What is the project's MIRR?

            Other information relevant to this project:

WACC                                                                                                                             11.0%

Pre-tax cash flow reduction for other products                                                                          -$5,000

Investment cost (depreciable basis)                                                                                $80,000

Straight-line deprec. rate                                                                                               33.333%

Sales revenues, each year for 3 years                                                                            $67,500

Annual operating costs (excl. depreciation.)                                                                    -$25,000

Tax rate                                                                                                                           35.0%

Explanation / Answer

Initial Investment Investment Cost $80,000 Working Capital $6,000 Total $86,000 Depreciation 26400 ($80000* 0.33) For Three Year Depreciation tax Sheild ($26400*0.35) 9240 CFAT ( Cash Flow After Tax) Sales Revenue $67,500 Less: Annual Operating Cost ($25,000) Less: Depreciation ($26,400) Profit Before Tax (PBT) $16,100 Less: Tax $5,635.00 ($16100*0.35) Profit After Tax $10,465.00 Add: Depreciation 26400 Less: Reduction in cash flow of other products (Opportunity Cost) ($5000*(1-0.35)- Post tax -3250 Cash Flow After tax $33,615.00 Present Value @ 11% for 3 years 2.443714715 Present Value of CFAT for 3 years $82,145.47 Net present Value ($82145-$86000) ($3,854.53) MIRR PVCIF= PVCOF ($33615* Present Value Annuity Factor for 3 Years) $86,000 Present Value Annuity Factor 2.558381675 ($86000/$33615) At 8% Annuity Factor for 3 years 2.577096987 At 9% Annuity Factor for 3 years 2.531294666 At 8.5% Annuity Factor for 3 years 2.554022371 Therefore MIRR= 8.5%

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

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