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NPV

If anyone can offer any type of significant help to me, or better yet get me on the right track, I would greatly appreciate it!

I've enclosed my problem down below and additional details are in the excel document. I'm having a hard time distinguishing what is meant by internal funds and if the numbers I'm obtaining are correct as well as if i'm on the right track. I'm also not sure what I should include in the costs when obtaining the answer for part 1 before subtracting depreciation. Thank you!

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Problem 1
1) A large manufacturing firm is approached by an equipment supplier for a machine that will replace labor. The machine is expected to last 12 years and is expected to have no salvage value. The firm is in the 30% tax bracket. The firm will depreciate the machine over the 12 year period using straight line method. The details are:
Cost of the machine\$10 million
Maintenance
The machine will require maintenance of \$50,000 in the first year. The maintenance costs will increase at 3% for the first 5 and 10% for the remaining 6 years. The costs are incurred at the end of the year.
Benefits:
1) Labor saving 4 workers will not be required. Assume that each worker costs the firm \$100,000 in the first year. The cost of each worker to the firm increases at 4% per year. All benefits start at the end of the first year of machine.
2) Raw Material saving
The machine will result in a more efficient recovery of metal that could be sold. Saving on raw material is 1 million pounds a year. The metal could be sold for \$0.80 a pound at the end of first year with prices expected to increase at 5% per year.
3) Utility savings
The machine will result in saving of \$100,000 in the first year. Utility prices are expected to increase at 5% every year.
4) Miscellaneous savings
Miscellaneous savings are \$200,000 in the first year. These savings are expected to increase at 3% every year.
1) What is the NPV of the machine using internal funds? The firm estimates that projects of similar risk return 10% per year. Suppose after you have done the calculations, the finance manager of the firm tells you that he made a mistake in estimating returns from projects of similar risk and that the true return from projects of similar risk as the machine is 10.5%. What is the new NPV? - (2+0.5 points)
2) What is the NPV of the machine using debt financing? In this case, the firm will have to issue bonds paying annual coupon at the rate of 10%. The bonds will have the same maturity as the life of the machine. - (2.5 points)
3) Finally, the firm can lease the machine. The equipment manufacturer is willing to lease the machine for payments of \$1,500,000 a year for 12 years. After 12 years the machine will remain with the firm, but it is expected to have no value at that time. What is the NPV of the leasing alternative? For this part, you have to do the following:
a) If the firm leases the machine, how will the lease be categorized as - capital (financial) or an operating lease? Why? - (1 point)
b) What is the NPV of the project if the firm decides to lease the machine? - (3 points)
4) As the decision maker, will you acquire this machine? If yes, which financing arrangement will you choose? - (1 point).
You can use the following templates to answer the questions. I expect that all of us will use excel to answer the questions.
1) Benefits
-Costs
-Depreciation
____________
EBT
-Taxes
____________
NI
+Depreciation
____________
CFO
2) Benefits
-Costs
-Depreciation
____________
EBIT
-Interest
____________
EBT
-Taxes
____________
NI
+Depreciation
____________
CFO
3) Each lease payment=principal payment+interest payment
Benefits
-Costs
-Depreciation
____________
EBIT
-Interest portion of lease payments
____________
EBT
-Taxes
____________
NI
-Principal portion of lease payments
+Depreciation
____________
CFO

Solution Summary

The solution goes into a great amount of detail in order to answer the question. The solution is very well written and easy to understand. The explanation can be very easily understood by anyone with a basic understanding of the concepts. Overall, an excellent response to the question being asked.

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