Provide an approximate value of the annual cash flow

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Reference no: EM131300052

A company wants to purchase new equipment to replace some old, existing equipment. The old equipment is fully depreciated and has a current market value of $1.2M. The new equipment costs $10.4M and will be depreciated for 5 years. The equipment produces items with constant annual revenues of $20M. Current costs (using the old equipment) are $3M per year. The new equipment will not change the expected revenues (they will remain at $20M per year), but will allow the company to cut costs by $1M per year. The project is expected to last for 4 years, at which time the new equipment would be worth $6.0M. If the old equipment is kept, it will be worthless in 4 years. The company's marginal tax rate is 35%. The company is financed with $50M of preferred stock and $150M of common stock. The preferred stock has a current value of $20 and pays constant dividends of $2 annually. The expected return on the common stock is 14.4%. Should the project be accepted?Describe and provide an approximate value of the initial cash flow. Describe and provide an approximate value of the annual cash flow. Provide an estimation of the life of the project, as well as the exit costs.Then, calculate the NPV and IRR of the project.

Reference no: EM131300052

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