Texas Roks, Inc. is considering a new quarry machine. The costs and revenues associated with the machine

Question:

Texas Roks, Inc. is considering a new quarry machine. The costs and revenues associated with the machine have been provided to you for analysis:

Cost of the new project......................................$4,000,000

Installation costs................................................$100,000

Estimated unit sales in year 1....................................50,000

Estimated unit sales in year 2....................................75,000

Estimated unit sales in year 3....................................40,000

Estimated sales price in year 1.....................................$150

Estimated sales price in year 2.....................................$175

Estimated sales price in year 3.....................................$160

Variable cost per unit................................................$120

Annual fixed cost.................................................$50,000

Additional working capital needed..........................$435,000

Depreciation method

3 years straight-line method, no salvage value

Texas Rok's tax rate......................................................0

Texas Rok's cost of capital...............................................0

Required:

1. Calculate operating cash flow and the change in net working capital.

2. Determine the NPV and IRR of the project.

3. Should the company accept or reject the project based on the NPV? Why?

4. Should the company accept or reject the project based on the IRR? Why?

5. What is your final accept or reject decision? Why?

6. What is the payback period for this project? Would this influence your decision to accept or reject?

Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important... Payback Period
Payback period method is a traditional method/ approach of capital budgeting. It is the simple and widely used quantitative method of Investment evaluation. Payback period is typically used to evaluate projects or investments before undergoing them,...