# Calculating project IRR, NPV and depreciation

Introduction

You will assume that you still work as a financial analyst for Aero-Botics, Inc. The company is considering a capital investment in a new machine and you are in charge of making a recommendation on the purchase based on a given rate of return of 12%.

Task 4. Capital Budgeting for a New Machine

A few months have now passed and Aero-Botics, Inc. is considering the purchase on a new machine that will increase the production of a special component significantly. The anticipated cash flows for the project are as follows:

Year 1 $750,000

Year 2 $1,000,000

Year 3 $1,100,000

Year 4 $1,150,000

Year 5 $1,200,000

You have now been tasked with providing a recommendation for the project based on the results of a Net Present Value Analysis. Assuming that the required rate of return is 15% and the initial cost of the machine is $3,500,000.

1. What is the project's IRR?

2. What is the project's NPV?

3. Should the company accept this project and why (or why not)?

4. Explain how depreciation will affect the present value of the project.

5. Provide examples of at least one of the following as it relates to the project:

a. Sunk Cost

b. Opportunity cost

c. Erosion

6. Explain how you would conduct a scenario and sensitivity analysis of the project. What would be some project-specific risks and market risks related to this project?

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INTRODUCTION

You will assume that you still work as a financial analyst for AeroBotics, Inc. The company is considering a capital investment in a new machine and you are in charge of making a recommendation on the purchase based on a given rate of return of 12%.

Task 4: Capital budgeting for a New Machine

A few months have now passed and AeroBotics, Inc. is considering the purchase on a new machine that will increase the production of a special component significantly. The anticipated cash flows for the project are as follows:

Year Cash flow

1 $750,000

2 $1,000,000

3 $1,100,000

4 $1,150,000

5 $1,200,000

You have now been tasked with providing a recommendation for the project based on the results of a Net Present Value Analysis. Assuming that the required rate of return is 15% and the initial cost of the machine is $3,500,000.

1. What is the project's ...

#### Solution Summary

The problem set deals with issues in finance: net present value and internal rate of return.

Calculate Project Cash Flows, NPV and IRR

Revenues generated by a new fad product in each of the next 5 years are forecasted as follows:

Year Revenue

1 $40,000

2 30,000

3 20,000

4 10,000

Thereafter 0

Expenses are expected to be 40% of revenues, and working capital required in each year is expected to be 20% of revenues in the following year. The product requires an immediate investment of $50,000 in plant and equipment.

A. What is the initial investment in the product? Remember working capital.

B. If the plant and equipment are depreciated over 4 years to a salvage value of zero using straight-line depreciation, and the firm's tax rate is 40%, what are the project cash flows in each year?

C. If the opportunity cost of capital is 10%, what is the projected NPV

D What is the project IRR

Please see attached template 7-21

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