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# Compute the Net Present Values of Projects

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Lang Industrial (LISC) must choose between two different conveyor belt systems. X costs \$236,000, has a four-year life, and requires \$74,000 in pretax annual operating costs. Y costs \$336,000, has a six-year life, and requires \$68,000 in pretax annual operating costs. In either case, the systems will be depreciated straight-line to zero over their lives and will have zero salvage value. Whether X or Y is picked, there will be no replacement after the system wears out. The tax rate is 30 percent and the discount rate is 9 percent.

Calculate the NPV for both conveyor belt systems. (Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places. (e.g., 32.16))

NPV
X \$

Y \$

________________________________________

Which conveyor belt system should the firm choose? X or Y?

#### Solution Summary

This solution illustrates how to compute the net present values of two projects with net cash outflows, and which one to choose.

\$2.19

## Computing and Explaining Net Present Value and Internal Rate of Return

ABC Corporation is considering an expansion project. To date they have spent \$150,000 investigating the viability of the project and have decided to proceed. The proposed project will cost \$1,500,000 in addition to the \$150,000 that was spent on the feasibility study. The project will be depreciated over a 3 year MACRS class life.

MACRS
Depreciation
Year Rates

1 0.33

2 0.45

3 0.15

4 0.07

If the project is undertaken the company will need to increase its inventories by \$500,000, and its accounts payable will rise by \$200,000. The company will realize an additional \$1,500,000 in sales over each of the next four years. The company's operating costs (not including depreciation) will increase by \$750,000 a year. The company's tax rate is 34%. At t = 3, the project's economic life is complete, but it will have a salvage value (before-tax) of \$150,000 after three years. The project's WACC is 12%.

a) What is the project's net present value (NPV)? What is the IRR?

b) Write a short memo to management explaining your analysis and making a recommendation. Should the project be accepted? Why or why not? (i.e. Explain what your numerical answer means.)

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