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))
Which conveyor belt system should the firm choose? X or Y?© BrainMass Inc. brainmass.com October 25, 2018, 8:57 am ad1c9bdddf
This solution illustrates how to compute the net present values of two projects with net cash outflows, and which one to choose.
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.
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.)View Full Posting Details