Question

I need help in tehse questins.. Please solve them 100% and please also show the steps so i can easily write in in word.. try to solve in word and please show steps so i can solve them.

Pluto Outerspace is considering the purchase of a new machine which will reduce manufacturing costs by $15,000 annually. Pluto will use the 5 yr MACRS accelerated method to depreciate the machine, and it expects to sell the machine at the end of its 5-year operating life for $10,000. The firm expects to be able to reduce net operating working capital by $15,000 when the machine is installed, but required working capital will return to the original level when the machine is sold after 5 years. Pluto's marginal tax rate is 40 percent, and it uses a 12 percent cost of capital to evaluate projects of this nature. If the machine costs $60,000, what is the project's NPV, IRR and MIRR?

Answer 1

Operating cash flow (OCF) each year = income after tax + depreciation.

Cash outflow in year 0 = cost of machine - reduction in working capital.

In year 5, the working capital is increased, and hence the cash flow from working capital in year 5 is negative

profit on sale of equipment at end of year 5 = sale price - book value.

book value = original cost - accumulated depreciation

after-tax salvage value = salvage value - tax on profit on sale of equipment.

Cash flow in year 5 = OCF + after tax salvage value - increase in working capital.

NPV, IRR and MIRR are calculated using NPV and IRR functions in Excel

NPV is $134.50

IRR is 12.14%

MIRR is 12.07%.

B28 fx =NPV(12%,C26:G26)+B26 C D E F G $60,000 $15,000 2 Initial Investment 3 Cost of machine 4. Reduction in working capital 5 6 OCF 7 Reduction in costs 8 - Depreciation 9 Increase in earnings before tax 10 - Taxes 11 Increase in earnings after tax 12 + Depreciation 13 OCF $15,000 $12,000 $3,000 $1,200 $1,800 $12,000 $13,800 $15,000 $19,200 ($4,200) ($1,680) ($2,520) $19,200 $16,680 $15,000 $11,520 $3,480 $1,392 $2,088 $11,520 $13,608 $15,000 $6,912 $8,088 $3,235 $4,853 $6,912 $11,765 $15,000 $6,912 $8,088 $3,235 $4,853 $6,912 $11,765 14 15 Terminal Cash Flow 16 Salvage Value 17 Accumulated depreciation 18 Book value of machine 19 Profit on sale of machine 20 Tax 21 Salvage Value after tax 22 Increase in working capital 23 Terminal Cash Flow 24 25 NPV Analysis 26 Project Cash Flows $10,000 $56,544 $3,456 $6,544 $2,618 $7,382 ($15,000) ($7,618) ($45,000) $13,800 $16,680 $13,608 $11,765 $4,147 28 NPV 29 IRR 30 MIRR $134.50 12.14% 12.07%

B C D E F G 2 Initial Investment 3 Cost of machine 4 Reduction in working capital 60000 15000 5. 6 OCE 7 Reduction in costs 8 - Depreciation 9 Increase in earnings before tax 10 - Taxes 11 Increase in earnings after tax 12 + Depreciation 13 OCF 15000 =$B$3*20% =C7-C8 =C9*40% =C9-C10 15000 =$B$3*32% =D7-D8 =D9*40% =D9-D10 =D8 =D11 D12 15000 =$B$3*19.2% =E7-E8 =E9*40% E9-E10 =E8 =E11E12 15000 =$B$3* 11.52% =F7-F8 =F9*40% =F9-F10 =F8 =F11+F12 15000 =$B$3*11.52% =G7-G8 =G9*40% =G9-G10 =G8 =G11+G12 -C8 =C11+C12 14 15 Terminal Cash Flow 16 Salvage Value 17 Accumulated depreciation 18 Book value of machine 19 Profit on sale of machine 20 Tax 21 Salvage Value after tax 22 Increase in working capital 23 Terminal Cash Flow 24 25 NPV Analysis 26 Project Cash Flows 10000 =SUM(C8:G8) =B3-G17 =G16-G18 =G19-40% =G16-G20 =-B4 =G21+G22 =-B3+B4 =C13 =D13 =E13 =F13 G13+G23 27 28 NPV 29 IRR 30 MIRR =NPV(12%,C26:26)+B26 =IRR(B26:26) =MIRR(B26:G26,12%, 12%) 31