Purchase Solution

# IRR Decision: What is the Breakeven Point, NPV, and IRR ofor Project Alpha?

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1. Your firm is considering buying a new machine that costs \$200,000, is expected to generate \$110,000 in new revenue each year and will cost \$45,000 a year to operate. If your firm's marginal income tax rate is 35% what is the Net Cash Flow your firm will realize from the new machine during the first year? Assume the MACRS depreciation rate for the machine for year 1 is 20%. Note - do not include the cost of the machine in your answer.

2. What is the payback period of the following project?

Initial Investment: \$50,000
Projected life: 8 years
Net cash flows each year: \$10,000

3. Consider the following income statement and answer the questions that follow:

Sales (100 units) \$200
Variable costs (\$.80 ea) 80
Fixed Costs 20
EBIT 100
Interest Expense 30
EBT 70
Income tax 24
Net Income 46

a. What is the firm's Breakeven Point in units?

b. Draw a breakeven chart for this firm.

4. Your firm is looking at a new investment opportunity, Project Alpha, with net cash flows as follows:
---- Net Cash Flows ----
Project Alpha

Initial Cost at T-0 (Now) (\$10,000)
cash inflow at the end of year 1 6,000
cash inflow at the end of year 2 4,000
cash inflow at the end of year 3 2,000

Calculate project Alpha's Net Present Value (NPV), assuming your firm's required rate of return is 10%.

5. Calculate the IRR of the following project:

Year Cash Flow
0 -\$30,000
1 \$40,000

##### Solution Summary

This solution provides calculations for payback period, breakeven, NPV and IRR. A breakeven chart is provided in the attached Excel file.

##### Solution Preview

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(IRR) Decision
1. Your firm is considering buying a new machine that costs \$200,000, is expected to generate \$110,000 in new revenue each year and will cost \$45,000 a year to operate. If your firm's marginal income tax rate is 35% what is the Net Cash Flow your firm will realize from the new machine during the first year? Assume the MACRS depreciation rate for the machine for year 1 is 20%. Note - do not include the cost of the machine in your answer.
Year Rate Basis Depreciation
1 20.00 0.2000*45000 = 9000 0.2000*200000 = 40000
Revenue = \$110,000
Variable Operating Cost = \$45,000
Net Operating Cash Flow = [Revenue - Operating Expense ...

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