Question

Please use excel file to solve

1. You are evaluating a project for your company. The project will require equipment that has a purchase price of $500,000, and will need to include $60,000 for delivery costs and $70,000 for installation related expenses. The equipment will be depreciated using MACRS as a 10 year class asset. Assume you expect a salvage value of $50,000 at the end of the projects life. In addition, land will need to be purchased for $1,500,000. The land is expected to increase in value by 5% per year over the life of the project, and will be sold at the end of the project’s life. Net working capital of $150,000 will be needed for the project, and will be returned at the end of the project’s life. The project has a useful life of 15 years.

The project will generate revenues of $900,000 each year, and have cash operating expenses of $550,000. The tax rate for ordinary income is 40%, and the tax rate for capital gains is 20%. The required rate of return is 12%. What is the NPV for the project? Also, calculate the IRR, MIRR, Profitability Index, and Payback for this project.

2. You are evaluating a small project for your company. The idea is to introduce a new, but short lived, new product. Sales over the 6 year useful life of the project will be 100,000 units, 120,000 units, 110,000 units, 100,000 units, 70,000 units and 70,000 in each of the 6 years. The price will fluctuate each year, with the pattern being $16, $18, $17, $14, $14 and $14. The cash operating expenses will be, on a per unit basis, $7, $8, $10, $8, $7 and $7. The project will require two pieces of equipment. The Loader will cost $500,000 installed, and the Stamper will cost $1,000,000 installed. Both will be depreciated using straight line depreciation over the 6 year useful life of the project. At the end of the project’s useful life, the Loader will be sold for $100,000 and the Stamper will be sold for $200,000. In addition, an investment in NWC will be required initially at a cost of $250,000, and at the end of the project’s life this investment will be returned. The tax rate is 40%, and your cost of capital is 13%. What is the IRR for the project? What is the MIRR for the project? Should the project be accepted? Assume that your worst case analysis is that all prices are $1 lower than your base case analysis. Does this change the IRR estimate? Is the project still acceptable?

Answer 1

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