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In: Accounting

FINE WOOD MACHINING IS CONSIDERING REPLACING AN EXISTING LATHE WITH A MORE EFFICIENT LATH. THE NEW...

FINE WOOD MACHINING IS CONSIDERING REPLACING AN EXISTING LATHE WITH A MORE EFFICIENT LATH. THE NEW LATHE COST $55,000 AND REQUIRES $5,000 IN INSTALLATION COST. THE OLD LATHE WAS PURCHASED 2 YEARS AGO FOR AN INSTALLED COST OF $35,000 AND HAS A BOOK VALUE OF $16,800. IT CAN BE SOLD TODAY FOR $20,000. ASSUME THE NEW MACHINE INCREASES WORKING CAPITAL BY $2,000. THE FIRM IS IN THE 21% TAX BRACKET. THE NEW MACHINE WILL PROVIDE $15,000/YEAR OF INCREMENTAL OPERATING CASH FLOWS FOR 4 YEARS AND THE COMPANY’S COST OF CAPITAL IS 10%.

I HAVE THE BA II PLUS AND THE TI-84 PLUS, PLEASE SHOW YOUR CALCULATED WORK. THANKS!

A: WHAT IS THE INITIAL INVESTMENT FOR THE PROPOSED PROJECT?

B: COMPUTE THE NET PRESENT VALUE FOR THE PROJECT.

C: COMPUTE THE IRR.

D: MAKE A RECOMMENDATION TO ACCEPT OR REJECT THE PROJECT AND EXPLAIN.

Solutions

Expert Solution

A) Intial Investment for proposed poject
= Cost Of New Machine + Installation Charges - cash from sale of old machine +working capital
=55000+5000-20000+2000
=$42000
B) Net Present Value
Year Cash Flow Discount Factor @10% Discounted Cash Flow
0 Intinal Invetsment -42000 1 -42000
1 Net Operatig Cash Flow 11850 0.909 10772.73
2 Net Operatig Cash Flow 11850 0.826 9793.388
3 Net Operatig Cash Flow 11850 0.751 8903.08
4 Net Operatig Cash Flow 11850 0.683 8093.709
4 realease of working capital 2000 0.683 1366
Total -3071.09
c) Calculation Of IRR
Year Cash Flow Discount Factor @6% Discounted Cash Flow
0 Intinal Invetsment -42000 1 -42000
1 Net Operatig Cash Flow 11850 0.943 11179.25 1
2 Net Operatig Cash Flow 11850 0.890 10546.46 2
3 Net Operatig Cash Flow 11850 0.840 9949.489 3
4 Net Operatig Cash Flow 11850 0.792 9386.31 4
4 realease of working capital 2000 0.747 1494.516 5
Total 556.0179
IRR = 6% + (556.10/(3071+556)*4
=6.6131%
d) Project should not be accepted , since IRR is less than compny's cost of capital i.e. 10%

ekkarill92 answered 9 hours ago
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