Reference no: EM133119475

SD Enterprises is considering a new three-year expansion project and is looking closely at investing in a new machine. The project will require an investment in a new production machine for an invoice price of $2 million, and it would cost an additional $320,000.00 to properly install the machine. To purchase the new machine, the ?rm would have to borrow $500,000.00 at 5% interest rate from Private Bank resulting in additional interest payment of $25,000.00 per year. The machine will be depreciated straight-line to zero over its three-year tax life, after which time it will be sold for $180,000.00. To properly operate the machine, inventory must be increased by $250,000.00. The oompany also hired a marketing ?rm to analyse the market at a oost of $15,000.00. An extract of the marketing report is as follow: The project is estimated to generate $1.735 million in annual sales, with costs of $650,000.00. The required retum on the project is 12 percent and the tax rate is 21 percent.

REQUIRED:

a. Calculate the payback period and net present value. Should the company buy the machine? Explain your answer.

b. Brie?y explain the relationship between IRR and NW. In which situation does IRR might be a more appropriate measure to use? Why do most ?nancial managers use IRR along with NPV when evaluating projects?