Question

A client of your financial consulting firm, Omaha manufacturing company, is considering a new investment proposal that involves manufacturing and selling bright blue self driving taxi cabs. You are asked to create the NPV analysis.

Your client has assembled the following information.

A new machine will have to be purchased today (Year0) at a cost of $120,000.

It will generate revenues all of which are taxable, expected to be $265,000, $240,000, $215,000 in each of the 3 years (year 1,2,and 3) of the project life.

Gross profit expected to be 30% of sales revenue

The new machine will be depreciated straight-line down to its salvage value of $0 over the 3 year life.

Tax rate of client is 21%. The company has a WACC of 14%

1. Depreciation expense increases the amount of tax paid? T/F

2. What is the NPV of the project?(round to nearest dollar)

3. What is the payback period in years?(round to 2 decimal places)

4.What is the IRR?(Round to 2 decimal places, i.e. enter 10.1% as 0.101)

5.Regardless of your answer on question 2, assume that the NPV is >0. Should you invest?

6.Regardless of your answer on question 3, assume the payback is more than 3 years should you invest in the project?

7. Regardless of your answer on question 4, assume the project has an IRR of 12%. Should you invest?

Answer 1