Question

Peter Cushions, Inc. is analyzing the proposed purchase of a new machine for $575,000. The proposed machine has an estimated economic life of six years but will be treated as five-year MACRS property for depreciation purposes. The machine will increase the firm's capacity, and it is expected to contribute $185,000 annually to earnings before depreciation, interest and taxes. The firm is in a 30% tax bracket and estimates its cost of capital to be 15%.

Calculate the NPV of this investment using an Excel spreadsheet. Show and label your work. Formulas for NPV and IRR are preprogrammed in Excel. Also calculate the IRR.

DO NOT hard enter calculated numbers. The numbers above should be hard entered somewhere on your spreadsheet as given variables. The spreadsheet itself should be comprised of formulas, so that you can change a variable (such as asset cost, tax rate or discount rate) and the spreadsheet will automatically recalculate NPV and IRR.

DO NOT submit someone else’s work. It is ABSOLUTELY IMPERATIVE that each student submits their own spreadsheet.

Make this a clean, professional, properly labeled, one-page report suitable for submission to your supervisor.

Need screenshots of the Excel spreadsheet formulas or explanations of how to get them for the calculations.

Answer 1

I am attaching the required excel screenshot with formulas and answers. Kindly go through it. Kindly also note the following assumptions in mind:

i. While applying MACRS, 200% deduction and half year convention has been followed due to lack of specifics.

ii. Since interest expense is not given, the same is conveniently ignored.

Hope it clarifies your query.