Considering project to purchase new equipment

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Reference no: EM131928662

Alessandro Florenzi Company (AFC) is considering a project to purchase a new equipment. The equipment would be depreciated by the straight-line method over its 3-year life and would have a zero-salvage value. The project requires investment of $6,000 today on net working capital, which will be recovered at the end of the third year when project is closed. Revenues and other operating costs are expected to be constant over the project's 3-year life. However, this project would compete with other company’s products and would reduce their pre-tax annual cash flows. The company can sell the equipment at the end of third year to generate $10,000 after tax cash flow. What is the project's MIRR?

Other information relevant to this project: WACC 11.0%

Pre-tax cash flow reduction for other products -$5,000 I

nvestment cost (depreciable basis) $80,000

Straight-line deprec. rate 33.333%

Sales revenues, each year for 3 years $67,500

Annual operating costs (excl. depreciation.) -$25,000

Tax rate 35.0%

Reference no: EM131928662

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