Reference no: EM132432107

Question - J. Morgan of SparkPlug Inc. has been approached to take over a production facility from B.R. Machine Company. The acquisition will cost $2,270,000, and the after-tax net cash inflow will be $418,000 per year for 12 years.

SparkPlug currently uses 12% for its after-tax cost of capital. Tom Morgan, production manager, is very much in favor of the investment. He argues that the total after-tax net cash inflow is more than the cost of the investment, even if the demand for the product is somewhat uncertain. "The project will pay for itself even if the demand is only half the projected level." Cindy Morgan (corporate controller) believes that the cost of capital should be 15% because of the declining demand for SparkPlug products.

Required:

1. What is the estimated NPV of the project if the after-tax cost of capital (discount rate) is 12%? Use the built-in NPV function in Excel.

2. What is the estimated NPV of the project if the after-tax cost of capital (discount rate) is 15%? Use the built-in NPV function in Excel.

3. Use the built-in function in Excel to estimate the project's IRR.

4. Do a sensitivity analysis by using GOAL SEEK to determine, given estimated cash inflows, the original investment outlay that would result in an IRR of 15%.