Question

Please show all work so I cam better understand and learn

Crazy Cliff’s Car Coral (CCCC) has an unusually large number of customers failing to make their car payments. Consequently, CCCC is considering investing in a GPS tracking system that will allow them to track and immobilize the cars when customers miss a payment. CCCC has already paid $10,000 in non-refundable fees necessary to get approval from the state. The system has an initial cost of $90,000 and a three-year useful life. CCCC depreciates all assets to zero using straight-line depreciation. The equipment has zero salvage value at the end of the project in 3 years. The new system also requires an additional investment in inventory of $6,000 at the beginning of the project (the inventory will be sold for $6,000 at the end of the project). CCCC estimates the new GPS system will save $60,000 per year in collection costs over the three-year life of the project. CCCC’s tax rate is 25% and the appropriate discount rate is 15%. What is the payback period of the project? What is the NPV of the project? What is the IRR of the project? Should CCCC accept the project?

Answer 1

The cashflows, NPV and IRR are explained in the above table

1.NPV=(rate, Year1 to Year3 cashflows)-Total cost

NPV=(15%,Year1 to year3 cashflows)-96000

NPV=$27,814.42 (which is positive)

2. =IRR(values)

=IRR(Year0 to Year3 cashflows)

IRR=31.51% (greater than discount rate of 15%)

3. Payback period is in how many years a company can retain their initial investment

In first year, company receives $52,000 and the remaining $43,500 in 2nd year. (96,000-52,000)

In 2nd year=$43,500/52,000=0.83

In 1.83 years, comapny can able to retin their investment which is a good thing

Hence, based on the all the capital budgeting tools, they can go for the project