Determining whether to accept project based on NPV and IRR

Assignment Help Financial Management

Reference no: EM131548231

Course ELO (Assessment exercise): Student will apply the critical thinking skills of interpretation, analysis, and explanation in determining whether to accept a project based on NPV and IRR.

ABC Corporation is considering an expansion project. To date they have spent $150,000 investigating the viability of the project and have decided to proceed. The proposed project will cost $1,500,000 in addition to the $150,000 that was spent on the feasibility study. The project will be depreciated over a 3 year MACRS class life.

MACRS

Depreciation

Year Rates

1 0.33

2 0.45

3 0.15

4 0.07

If the project is undertaken the company will need to increase its inventories by $500,000, and its accounts payable will rise by $200,000. The company will realize an additional $1,500,000 in sales over each of the next three years. The company’s operating costs (not including depreciation) will increase by $750,000 a year. The company’s tax rate is 34%. At t = 3, the project’s economic life is complete, but it will have a salvage value (before-tax) of $150,000 after three years. The project’s WACC is 12%.

a) What is the project’s net present value (NPV)? What is the IRR?

b) Write a short memo to management explaining your analysis and making a recommendation. Should the project be accepted? Why or why not? (i.e. Explain what your numerical answer means.)

Reference no: EM131548231

Questions Cloud

Explain in detail the concept of risk versus return : Explain in detail the concept of risk versus return. Give an example of an asset class.

Several individual stocks and various types bonds : Illustrate diversification by naming several individual stocks and/ or various types bonds,

Use capital lease approach and instead of operating lease : After assessing the effect of lease accounting policy on overall financial reporting, Rooping chooses to use capital lease approach, instead of operating lease.

What are the tax advantaged accounts : What are the tax advantaged (also known as "qualified") accounts typically offered to employees?

Determining whether to accept project based on NPV and IRR : Student will apply the critical thinking skills of interpretation, analysis, and explanation in determining whether to accept a project based on NPV and IRR.

How much will you need to invest at the end of each year : how much will you need to invest at the end of each year in equal amount for 18 years to accumulate 400,000?

What is the total cost of treatment at the end of the year : What is the total cost of treatment at the end of the year at an interest rate of 12% per year compounded quarterly?

Aerosystems is estimating total payroll expense : Aerosystems is estimating a total payroll expense of $1,000,000 at the end of first year.

Briefly explain the effect of the choosing capital lease : briefly explain the effect of the choosing capital lease over operating lease in 2016 financial reporting

User Account

All Pages