Calculate the internal rate of return

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Reference no: EM133327599

Case: TexMex Food Company is considering a new salsa whose data are shown below. The equipment to be used would be depreciated by the straight-line method over its 3-year life and would have a zero salvage value, and no new working capital would be required. Revenues and other operating costs are expected to be constant over the project's 3-year life. However, this project would compete with other TexMex products and would reduce their pre-tax annual cash flows. What is the project's NPV?

WACC	10.0%
Pre-tax cash flow reduction for other products (cannibalization)	-$5,000
Investment cost (depreciable basis)	$80,000
Straight-line depreciation rate	33.333%
Sales revenue, each year for 3 years	$67,500
Annual operating costs (excluding depreciation)	-$25,000
Tax rate	35.0%

Q 2: The Sumitomo Chemical Corporation is considering replacing a 5-year-old machine that originally cost $50,000 and can be sold for $60,000. This machine is totally depreciated. The replacement machine would cost $125,000 and have a 5-year expected life over which it would be depreciated down using the straight-line method and have no salvage value at the end of five years. The new machine would produce savings before depreciation and taxes of $45,000 per year. Assuming a 34 percent marginal tax rate and a required return of 10%, calculate:

(a) The internal rate of return and the net present value
(b) Assume now that the machine to be replaced is not totally depreciated. This machine presently has a book value of $25,000. It is currently being depreciated using the straight-line method down to a terminal value of zero over the next five years, generating a depreciation of $5,000 per year. If the rest of the problem's variables do not vary, what is now the net present value of substituting the machine?

Reference no: EM133327599

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