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    Calculate NPV, IRR for project; evaluate a capital budgeting

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    1. Given the following information, calculate the NPV and IRR and give your recommendation on the project (accept/reject).

    - Cost of automation system (invoice): $750,000
    - Transportation and installation: $150,000
    - Training: $100,000
    - Firm's WACC: 10%
    - Firm's tax rate: 40%
    - Capital gains tax: 28%
    - Depreciation 5 years, straight line.
    - Life of project: 3 years
    - Salvage value: $375,000
    - Annual cost savings (net operating expenses): $100,000
    - Increased annual sales (net operating expenses): $200,000

    2. Comprehensive Capital Budgeting Problem

    You are asked to evaluate a new product line to replace an existing product that is at the end of its product life cycle. From talking with the engineering, marketing and tax departments, the vendors and banks, you arrive at the following assumptions:

    - The new product line will replace the existing product line. Lost revenues from replacing the existing product line are expected to be $1,500,000 in YR 1. The existing product was to be discontinued after YR 1.
    - The combined Federal and State tax rate is 38.5%.
    - The machinery invoice is $25,000,000, including transportation and installation.
    - Depreciation on the machinery is 20 years. Use straight line.
    - The total market for the product is $350,000,000 (Yr. 1), and expected to grow at a 10% annual rate over the next five years.
    - Your company anticipates gaining an average 1% of the total market share the first year, 5% of the total market share the second year and 8% of the total market share the third year. After year three the line will be salvaged and a new facility is planned to incorporate economies of scale.
    - Administrative and operating expenses are estimated to be 40% of annual gross revenues.
    - The firm's WACC is 10.3%
    - The salvage value at the end of three years is estimated to be $22,500,000.
    - Any losses can be used against other gains in the company for tax purposes.

    Find the NPV, the IRR, and give your recommendation

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    Solution Summary

    The solution calculates the NPV, IRR for projects and evaluates capital budgeting.