Question

The Luddite Corporation is considering replacing its southwest production line with a totally new system that will increase production as well as decreasing costs from labor and material waste. The new line will cost $680,000 to have in place ready to go. Luddite expects that it will increase cash flows by $120,500 each year for ten years. At the end of its expected life, the system's salvage value is expected to equal the costs to remove it. The required return for the project is 12% under Luddite's capital budgeting guidelines and the reinvestment rate is expected to be 6%. Calculate the value to the firm, showing all work, and state whether the project should be undertaken or not by each of the following methods: NPV,IRR,MIRR, PI, Payback, Discounted Payback.

Year Cash Flows Net CF 0 (680,000.00)    -680,000 1 120,500 120,500 2 120,500 120,500 3 120,500 120,500 4 120,500 120,500 5 120,500 120,500 6 120,500 120,500 7 120,500 120,500 8 120,500 120,500 9 120,500 120,500 10 120,500 120,500

Answer 1

Using NPV rule, as NPV >0, the project shall be accepted

Using IRR rule, as IRR> Required rate of return, the project shall be accepted

Using MIRR rule, as MIRR < Required rate of return, the project shall not be accepted

Using Pi rule, as PI>1, the project shall be accepted

Using Payback and Discounted payback rules, since there is no acceptable payback given, a decision cannot be taken

Formulae