Question

Please show all steps and calculations. Answers without steps and calculations will not receive full points. (1) A firm is considering an expansion project that will last three years. The project requires an immediate purchase of a new equipment that costs $900,000. The equipment will be fully depreciated using straight-line method over the next three years. The resale price of the equipment at the end of year three is estimated to be $200,000. The project will generate annual sales of $750,000 and incur annual costs (all costs except depreciation expense) of $200,000 for each of the next three years. The project requires an immediate investment of $50,000 in NWC, which will be fully recovered in year 3. The corporate tax rate is 30%. Calculate the Cash Flow from Assets (Project Cash Flow) for the project for years 0, 1, 2, and 3. (2) For the project above in question (1), calculate the payback period, the discounted payback period, the net present value, and the internal rate of return. Assume that the required rate of return is 15%. Consider the following two projects A and B. Assume that the appropriate discount rate for each project is 20% Year CF for Project A CF for Project B -S100 (3) If projects A and B are independent projects, which project(s) should you accept based on your best capital budgeting criteria? Please explain your rationale. (4) If projects A and B are mutually exclusive projects, which project(s) should you accept based on your best capital budgeting criteria? Please explain your rationale.

Answer 1

Calculate the project cash flows for years 0, 1, 2, and 3.

Calculate the payback period, discounted payback period, internal rate of return (IRR) and net present value (NPV).

Formulas used:

Results obtained:

Therefore,

The payback period is 2 years

The discounted payback period is 2.41 years

The NPV is $259,460.01

The IRR is 29.94%