Question

J. Morgan of SparkPlug Inc. has been approached to take over a production facility from B.R. Machine Company. The acquisition will cost $1,960,000, and the after-tax net cash inflow will be $330,000 per year for 12 years.

SparkPlug currently uses 10% for its after-tax cost of capital. Tom Morgan, production manager, is very much in favor of the investment. He argues that the total after-tax net cash inflow is more than the cost of the investment, even if the demand for the product is somewhat uncertain. “The project will pay for itself even if the demand is only half the projected level.” Cindy Morgan (corporate controller) believes that the cost of capital should be 13% because of the declining demand for SparkPlug products.

Required:

1. What is the estimated NPV of the project if the after-tax cost of capital (discount rate) is 10%? Use the built-in NPV function in Excel. (Negative amounts should be indicated by a minus sign. Round your answer to the nearest whole dollar amount.)

2. What is the estimated NPV of the project if the after-tax cost of capital (discount rate) is 13%? Use the built-in NPV function in Excel.  (Negative amounts should be indicated by a minus sign. Round your answer to the nearest whole dollar amount.)

3. Use the built-in function in Excel to estimate the project’s IRR. (Round your answer to 1 decimal places.)

	1. NPV 2. NPV 3. IRR % 4. Break-even amount

Answer 1

Sparkplug Machine purchasing from BR Machine For 12 years Initial Acquisition Cost (1,960,000.00) 3,996,000.00 After Tax Net Cash Inflow 333,000 12 3,996,000.00 After Tax Cost of Capital 10% After Tax Cost of Capital 13% NPV at 10% $1,672,727.27 NPV at 13% $1,576,283.19 IRR 104% Break Even Amount 1,960,000.00 In the absence of any other information

With Formula (Press ctrl + ~) , After Tax Cost of Capital and IRR are in Percentage

Sparkplug Machine purchasing from BR Machine For 12 years =G6 -1960000 333000 0.1 12 =E6*F6 Initial Acquisition Cost After Tax Net Cash Inflow After Tax Cost of Capital After Tax Cost of Capital NPV at 10% NPV at 13% IRR 0.13 =E5+NPV(E7,66) =E5+NPV(E8,66) =IRR(E5:F5,10%) Break Even Amount 1960000 In the absence of any other inf