Kelly Black is manager of an independent car repair business, Quik Fix. Kelly would like to buy computer diagnostic equipment that costs $10,000. The equipment will last 6 years. Kelly estimates that the incremental operating cash savings from using the equipment will be $3,000 annually, measured at current prices. For income tax purposes, she will depreciate the equipment using the 5-year MACRS schedule. Kelly requires a 10% real rate of return. The annual inflation rate is 5%, and the marginal income tax rate is 30%.

The following questions will help you analyze the information for this problem. Do not turn in your answers to these questions unless your professor asks you to do so.
A. Create a spreadsheet schedule showing the net present value calculations for the equipment.
B. Identify factors in your calculations that are uncertain, and explain why.
C. Explain how changes in technology might influence the risk involved in this project.
D. Decide which of the factors you identified in part (B) would likely have a significant impact on the net present value calculation. Use your spreadsheet to vary each of these factors, performing sensitivity analyses.
E. Use the quantitative results and your judgment to interpret your sensitivity analyses. Which factors seem to have the largest and smallest effects on the NPV results?
F. Describe the pros and cons of investing in the equipment.

Suppose you are the cost accountant for Quik Fix. Turn in your answers to the following.
G. Use the information you learned from the preceding analyses to write a memo to Kelly with your recommendation about whether to accept or reject this project. Refer in your memo to one or more attachments of spreadsheet schedules that would be useful to Kelly. In your memo, address the most important factors that Kelly should consider in making the decision.

  • CreatedJanuary 26, 2015
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