Asked by Prabha Karki on Jul 16, 2024
Verified
You have been asked to evaluate the purchase of a new machine for your company. It will cost $60,000, and it falls into the MACRS 3-year class (Yr. 1 - 33.3%; Yr. 2 - 44.4%; Yr. 3 - 14.8%; Yr. 4 - 7.5%). The purchase will require a $6,000 increase in repair parts inventory. Parts are expensed for tax purposes at the time they are acquired. The machine will replace one $25,000/year operator. It is expected to last for four years when it can be sold including any spare parts still on hand for $5,000. The tax rate is 40% and your company's cost of capital is 12%.
Project the project's cash flows and calculate its NPV and IRR
MACRS
MACRS, or Modified Accelerated Cost Recovery System, is a method of depreciation in the United States that allows for faster asset expense recovery over time for tax purposes.
Cash Flows
The movement of money into and out of a business or project, considered crucial for gauging its financial health.
- Evaluate the preliminary expenses, cash inflows from operations, and ultimate cash flows for investment projects.
- Execute the Modified Accelerated Cost Recovery System (MACRS) methodology for purposes of tax depreciation.
- Examine financial viability of capital projects by employing Net Present Value (NPV) and Internal Rate of Return (IRR) analyses.
Verified Answer
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Final Answer :
Project cash flows
CFo = -63,600, C01 = 22,992, C02 = 25,656, C03 = 18,552, C04 = 19,800; NPV: I = 12
NPV=3,170 IRR = 14.4%
CFo = -63,600, C01 = 22,992, C02 = 25,656, C03 = 18,552, C04 = 19,800; NPV: I = 12 NPV=3,170 IRR = 14.4%
Learning Objectives
- Evaluate the preliminary expenses, cash inflows from operations, and ultimate cash flows for investment projects.
- Execute the Modified Accelerated Cost Recovery System (MACRS) methodology for purposes of tax depreciation.
- Examine financial viability of capital projects by employing Net Present Value (NPV) and Internal Rate of Return (IRR) analyses.
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