You will assume that you still work as a financial analyst for AirJet Best Parts, Inc. The

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You will assume that you still work as a financial analyst for AirJet Best Parts, Inc. The company is considering a capital investment in a new machine and you are in charge of making a recommendation on the purchase based on (1) a given rate of return of 15% (Task 4) and (2) the firm’s cost of capital (Task5). A few months have now passed and AirJet Best Parts, Inc. is considering the purchase on a new machine that will increase the production of a special component significantly. The anticipated cash flows for the project are as follows:

Year 1........$1,100,000

Year 2........$1,450,000

Year 3........ $1,300,000

Year 4........ $ 950,000

You have now been tasked with providing a recommendation for the project based on the results of a Net Present Value Analysis. Assuming that the required rate of return is 15% and the initial cost of the machine is $3,000,000.


1. What is the project’s IRR? (10 pts).

2. What is the project’s NPV? (15 pts). 

3. Should the company accept this project and why (or why not)? (5 pts). 

4. Explain how depreciation will affect the present value of the project. (10 pts).

5. Provide examples of at least one of the following as it relates to the project: (5 pts each). 

6. Explain how you would conduct a scenario and sensitivity analysis of the project.

What would be some project-specific risks and market risks related to this project? (20 pts). 


Net Present Value
What is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at...
Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...
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Fundamentals of Financial Management

ISBN: 978-0324597707

12th edition

Authors: Eugene F. Brigham, Joel F. Houston

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