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.)© BrainMass Inc. brainmass.com October 25, 2018, 9:55 am ad1c9bdddf
This solution illustrates the assumptions inherent in computing net present value and illustrates how to compute net present value and internal rate of return.
Capital Budgeting is a decision making and control tool with a primary focus on projects and investments whose impact is over a period of time.
A non-profit organization believes it can save $28,000 a year in cash operating costs for the next 10 years with the purchase of a custom-made machine that costs $110,000. This machine is expected to have a zero disposal value. The organization's rate of returns is 14%.
1. Explain and compute the payback period
2. Explain and compute the net present value (NPV)
3. Explain and compute the internal rate of returns (IRR)
4. Explain and compute the accounting rate of returns (ARR)
Using the Net Initial Investment with straight line amortization method.