J. Morgan of SparkPlug Inc. has been approached to take over a production facility from B.R. Machine Company. The acquisition will cost $1,620,000, and the after-tax net cash inflow will be $248,000 per year for 12 years. SparkPlug currently uses 8% 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 11% because of the declining demand for SparkPlug products.

Required:

1. Assume the project's after-tax cost of capital is 8%. Calculate the NPV of this project. Should Morgan accept the project?

2. Calculate the NPV of this project, if Cindy Morgan is correct and uses 11%. Should Morgan accept the project?

3. Use the built-in function in Excel to estimate the project’s IRR.

4. Do a sensitivity analysis by using GOAL SEEK to determine, given estimated cash inflows, the original investment outlay that would result in an IRR of 11%.

Answer rating: 100% (QA)

1 The following assumptions has to be taken The total initial investment is 1620000 The cost of capital is 8 The after tax cash inflow taken are 248000 The number of years of the project is 12 years T... View the full answer