A toy manufacturer is considering the installation of a new process machine for its toy manufacturing facility.
Question:
A toy manufacturer is considering the installation of a new process machine for its toy manufacturing facility. The machine costs $350,000 installed, will generate additional revenues of $120,000 per year, and will save $50,000 per year in labor and material costs. The machine will be financed by a $250,000 bank loan repayable in three equal annual principal installments plus 9% interest on the outstanding balance. The machine will be depreciated by seven‐year MACRS. The useful life of this process machine is 10 years at which time it will be sold for $20,000. The combined marginal tax rate is 40%.
(a) Find the year‐by‐year after‐tax cash flow for the project.
(b) Compute the IRR for this investment.
(c) At MARR = 18%, is this project economically justifiable?
Minimum Acceptable Rate of Return (MARR), or hurdle rate is the minimum rate of return on a project a manager or company is willing to accept before starting a project, given its risk and the opportunity cost of forgoing other...
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