Edinaman Company (Edinaman) currently processes seafood with a unit purchased several years ago. The unit which originally cost $500,000, currently has a book value of $250,000. Edinaman is considering replacing the existing unit with a newer, more efficient one. The new unit will cost $700,000 and will require an additional $50,000 for delivery and installation and require Edinaman to increase initial net working capital (NWC) by $40,000. The new unit will be depreciated on a straight-line basis over 5 years to zero balance. Edinaman expects to sell the existing unit for $275,000. Edinaman’s marginal tax rate is 40%. If Edinaman purchases the new unit, its annual revenues are expected to increase by $100,000 (due to increased processing capacity) and its annual operating costs are expected to decrease by $20,000. Annual revenues and operating costs are expected to remain constant at this new level over the 5-year life of the project. After 5 years, the new unit will be completely depreciated and expected to be sold for $70,000.

Questions:

1.Calculate Edinaman’s Payback period and Profitability Index of the project. (show formula and calculations)

2.What is Edinaman’s NPV and IRR? Should the project be accepted or reject? show formula and calculations .Justify

3.Assuming Edinaman own’s 80 percent of the company; how does the net present value (NPV) decision rule relate to the primary goal of financial management, which is creating wealth for Edinaman?

Answer rating: 100% (QA)

ANSWER 1 Payba c k Period and Profitability Index The payback period is the amount of time it takes for a project to recoup its initial investment It ... View the full answer