Question

Roten Manufacturing Company is considering an investment on a machine for producing auto parts. The machine costs $250,000 today, will have a five-year life and will be depreciated over a five-year life on a straight-line basis toward a zero salvage value. The company paid a consulting company $7,000 last year to help them decide whether there is a sufficient demand for the auto parts. In addition to the investment on the machine, the company also invests $15,000 in net working capital but decides NOT to recoup the net working capital at the end of the fifth year. The company has estimated the performance of the new machine and believes the following are good estimates of the new asset: sales $140,000 per year, cost of goods sold (35% of sales) per year, and administrative expenses $15,000 per year. The company pays interest $20,000 annually on average, has a 10% cost of capital and a 30% tax rate. Answer the following questions.

What is NPV for the project?

	a.	$2,653.87
	b.	-$6,468.34
	c.	$1,653.45
	d.	-$31,469.12

What is IRR for the project?

	a.	7.74%
	b.	8.52%
	c.	9.04%
	d.	6.39%

What is PI for the project?

	a.	1.8968
	b.	0.9756
	c.	0.9430
	d.	1.0

Should Roten accept the project?

	a.	No
	b.	Yes

Answer 1

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

Cell reference -