Curtis Construction is considering a new manufacturing tool that will cost $2,000,000.
The manufacturing tool is in the Modified Accelerated Cost Recovery System 3-year class and will be sold after 3 years for $200,000. Use of the tool will increase net working capital by 200,000. The tool will save $550,000 each year in operating costs. The company's tax rate is 40 percent and its cost of capital is 20%.
1. What is the cash flow in Year 0.
2. What is the incremental operational cash flows.
3. What is the terminal year cash flow.
4. What is the project's payback period.
5. What is the project's net present value.
6. What is the project's internal rate of return
7. What is the project's Modified internal rate of return.
8. Should the decision to invest be accepted or rejected?
The solution examines the cash flow estimates for Curtis Construction. The incremental operational cash flows are determined.