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Steele Electronics: Economic Profit and NPV

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Please use the attached spreadsheet

Steele Electronics is considering an investment in a new component that requires a $100,000 investment in new capital equipment, as well as additional net working capital. The investment is expected to provide cash flows over the next five years. The anticipated earnings and project free cash flows for the investment are found in the table. (the table attached in the spreadsheet)

a. Assuming a project cost of capital of 11.24%, calculate the project's NPV and IRR.
b. Steele is considering the adoption of economic profit as a performance evaluation tool. Calculate the project's annual economic profit using the invested capital figures found in the table. How are your economic profit estimates
related to the project's NPV?
c. How would your assessment of the project's worth be affected if the economic profits in 2006 and 2007 were both negative? (No calculations required)

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Steps for calculating NPV and IRR are provided.

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Economic Profit and NPV for Steele Electronics

Economic Profit and NPV

Steele Electronics is considering an investment in a new component that requires a $100,000 investment in new capital equipment, as well as additional net working capital. The investment is expected to provide cash flows over the next five years. The anticipated earnings and project free cash flows for the investment are found in the table (See Excel attachment).

a) Assuming a project cost of capital of 11.24%, calculate the project's NPV and IRR.

b) Steele is considering the adoption of economic profit as a performance evaluation tool. Calculate the project's annual economic profit using the invested capital figures found in the table (Recall that the invested capital in the project is equal to net fixed assets plus net working capital) (see excel attachment for table). How are your economic profit estimates related to the project's NPV?

c) How would your assessment of the project's worth be affected if the economic profits in 2006 and 2007 were both negative? (no calculations required)

See attached excel file

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