Reference no: EM132036689
You have been asked by the president of your company to evaluate the proposed acquisition of a new project for the firm. The equipment needed for this expansion project would cost $135,000. This equipment has a 5-year life and would be depreciated using straight-line depreciation to zero by the end of year 5. It will be sold for $40,000 at the end of year 5. The use of the new equipment would require an increase in net working capital of $3,000. There would be an increase in sales of $62,000 per year and the new project would require an annual cash operating expense of $30,000. At the end of year 5, the firm will recover the net working capital of $3,000. The firm’s marginal tax rate is 40%.
What is the initial cash outflow (investment outlay) of the project in year 0?
1) $3,000
2) $40,000
3) $62,000
4) $135,000
5) $138,000
What is the operating income before taxes in each year from year 1 to year 5?
1) $4,000
2) $5,000
3) $30,000
4) $40,000
5) $62,000
What is the after-tax operating cash flow in each year from year 1 to year 5?
1) $3,000
2) $30,000
3) $40,000
4) $50,000
5) $62,000
What is the total after-tax cash flow in year 5?
1) $57,000
2) $62,000
3) $70,000
4) $102,000
5) $135,000
What is the net present value (NPV) for the project if the cost of capital is 12%? Would you accept the project under the NPV rule?
1) Accept the project since the NPV is $14,536
2) Accept the project since the NPV is $10,536
3) Accept the project since the NPV is $4,536
4) Reject the project since the NPV is -$4,536
5) Reject the project since the NPV is -$14,536
What is the modified internal rate of return (MIRR) for the project if the cost of capital is 12%? Would you accept the project under the MIRR rule?
1) Accept the project since the MIRR is 14.04%
2) Accept the project since the MIRR is 12.94%
3) Accept the project since the MIRR is 12.49%
4) Reject the project since the MIRR is 9.53%
5) Reject the project since the MIRR is 6.35%