Calculate internal rate of return and profitability index

Assignment Help Financial Management

Reference no: EM131492129

Please show detailed formulas AND calculations and explain rationale for each answer.

You have been asked by the firm to evaluate the acquisition of a special-purpose machine. The machine costs $600,000. The machine will be depreciated to a zero-book value on a straight-line basis over 4 years. It will be sold at the end of year 4 for $200,000. The machine will increase initial net working capital by $20,000 for parts (none of this will be recovered). The machine will generate an additional $100,000 per year in sales (due to faster production) and will save the firm $250,000 per year in costs (enhanced efficiency). Tax rate is 40%. Cost of capital is 12%.

A Calculate the net present value.

B. Calculate internal rate of return and profitability index.

C. Use NPV to decide whether to acquire the machine. Explain your decision.

D. Now suppose the machine falls into the 3-year MACRS class. All other assumptions are the same. MACRS depreciation rates in years 1, 2, 3 and 4 are 33.33%, 44.45%, 14.81% and 7.41% respectively. Find the NPV and compare it to the original NPV.

Reference no: EM131492129

Questions Cloud

Why is response time critical at the device level : At what level can COTS equipment be used in an industrial network? Which level of an industrial network is the most difficult to implement in Ethernet.

Risk types can be diversified by adding stocks to portfolio : Which of the following risk types can be diversified by adding stocks to a portfolio?

Assignment on you are a consultant : Imagine that you are a leadership teamwork consultant. The new manager of a company has hired you to create a new theme for the company's teamwork training.

What is the purpose of controllers at the controller level : Why is determinism a major obstacle to industry adopting Ethernet at the controller level?

Calculate internal rate of return and profitability index : You have been asked by the firm to evaluate the acquisition of a special-purpose machine. Calculate internal rate of return and profitability index.

Diversified by adding stocks to a portfolio : Which of the following risk types can be diversified by adding stocks to a portfolio?

This equipment is considered industrial machinery : this equipment is considered industrial machinery and thus qualifies as seven-year MACRS property.

What is the big concern with a linear network topology : List four improvements made in Ethernet that have helped provide determinism.

Amount of information you wish to communicate : You have decided to use print media to advertise your product because the amount of information you wish to communicate is large.

User Account

All Pages