Incremental cash-flows, npv,irr,AAR
Not what you're looking for?
A company is considering adding a new line of products. The production line would be set up in its main plant. The machinery's invoice price would be $200,000.
Another $10,000 in shipping charges would be incurred and it would cost an additional $30,000 to install the equipment. Further the firm's inventories would have to be increased by $25,000 to handle the new line, but its accounts payable would rise by $5,000. The machinery has an economic life of 4 years, and the company expects to depreciate the asset to zero on a straight line basis over 4 years. Its expected salvage value is $25,000.
The new line would generate $125,000 in incremental revenues,(after expenses, but before taxes and excluding depreciation) in each of the next 4 years. The firm spent $100,000 last year to rehabilitate the production line site. The space envisaged for the new project could be leased out to an associated corporation for $25,000 (pre-tax) a year. The new product line is expected to decreases sales of the firms other lines by $10,000 (pre-tax) in the first year, to rise by 20% in each of the second, third and fourth year of the project. Firm's tax rate is 34%
a. Define the incremental cash-flows for the project on a year by year basis
b. Given a discount rate of 12%, calculate the projects NPV, IRR, Profitability index, payback period and average accounting return.
c. Does the payback method agree with the NPV? Explain
Purchase this Solution
Purchase this Solution
Free BrainMass Quizzes
Operations Management
This quiz tests a student's knowledge about Operations Management
Team Development Strategies
This quiz will assess your knowledge of team-building processes, learning styles, and leadership methods. Team development is essential to creating and maintaining high performing teams.
Understanding the Accounting Equation
These 10 questions help a new student of accounting to understand the basic premise of accounting and how it is applied to the business world.
Managing the Older Worker
This quiz will let you know some of the basics of dealing with older workers. This is increasingly important for managers and human resource workers as many countries are facing an increase in older people in the workforce
Motivation
This tests some key elements of major motivation theories.