Mac Too. is evaluating the purchase of a machine that has a price tag of $250,000. It
Question:
Mac Too. is evaluating the purchase of a machine that has a price tag of $250,000. It is estimated that shipping and installation costs for this machine will amount to $25,000. Further, the purchase of this machine will require an initial investment of $40,000 in net working capital (raw materials inventory etc.) which is expected to be reversed and recovered exactly when the machine is sold in the future. If it purchases the machine, Lee expects to employ it for a total of 6 years, and then sell it for an estimated $100,000. During each of those 6 years, the machine is expected to contribute $95,000 to the sales revenue of the company, though it will also entail additional operating costs (NOT including depreciation) of $35,000 annually. If purchased, the machine will be fully depreciated over 6 years.
A. Find the initial (i.e. Time 0) cash outlay this machine will require.
B. Find the annual incremental operating cash flow (OCF) this machine will require for Times 1, 2, 3, 4, & 5.
C. Find the “terminal cash flow” (i.e. Time 6 cash flow) associated with this machine.
D. Find the internal rate of return (IRR) of this project.
E. Based on its IRR, should the project be taken? Explain.
F. Find the net present value (NPV) of this project.
G. Based on its NPV, should the project be taken? Explain.
H. For parts E and G above, what are you implicitly assuming about the risk of the project under consideration?
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Accounting Principles
ISBN: 978-0470533475
9th Edition
Authors: Jerry J. Weygandt, Paul D. Kimmel, Donald E. Kieso