Reference no: EM133114650

Cardinal Contractors is considering a proposal to enter a new line of business. In reviewing the proposal, the company's CFO is using the following facts:

• The new business will require the company to purchase additional fixed assets that will cost $1,000,000 at t = 0. For tax purposes the facility will be depreciated on a straight-line basis to zero over 3 years.
• At the end of three years, the company will exit the business and will sell the fixed assets at an estimated value of $300,000.
• The project will require a $60,000 increase in current assets, and a $30,000 increase in accounts payable at t = 0.
• The company's marginal tax rate is 25%.
• The new line of business is expected to generate an additional $1,800,000 in annual sales. The operating costs excluding depreciation are expected to be $1,400,000 per year.
• The project's cost of capital is 12%.

a. Set up a spreadsheet and calculation of projected cash flows

b. Calculate NPV (using excel function)

c. Calculate IRR (using excel function)

d. Calculate MIRR (using excel function)

e. Calculate payback period

f. Calculate discounted payback period

g. Answer to whether the company should accept the project and why.

h. Graph the NPV profile for the project (using excel)

Five-Year MACRS depreciation schedule