Question

In: Finance

the board of directors has asked you to assess the financial impact and make a recommendation...

the board of directors has asked you to assess the financial impact and make a recommendation regarding the acquistion of equipment.
After detailed analysis you conclude that:
The purchase price of the equipment is 178000 and will be depreciated over 3 years and sold for $ 59,000. If you purchase the equipment revenues will increase by $98,000 per year and expenses will increase by $28,000 per year. your tax rate is 40% and WACC is 12%.
Accounts receivable will increase by $7000, inventory increases by $ 5000 and payables increase by 13,000.
what is the payback period, NPV, IRR, AND MIRR?
What do you recommend to the Board and why?
Depreciation rates: 33%, 45%, 15% and 7 %.


Solutions

Expert Solution

NPV $6,032.14
IRR 13.86%
MIRR 13.26%
Payback 2.41

The Operating cash flows are

OCF MACRS 3 year
Year Cash flows Depreciation EBIT Tax PAT OCF
1 70000 -58740 11260 -4504 6756 65496
2 70000 -80100 -10100 4040 -6060 74040
3 70000 -26700 43300 -17320 25980 52680
Salvage
Purchase price 178000
Less: Depreciation -165540
Closing book value 12460
Selling price 59000
Gain/(loss) 46540
Tax/ Saving -18616
Net salvage 40384

Hence the Cash flows are:

Year Initial cash flow OCF Working capital Salvage Net cash flows
0 -178000 1000 -177000
1 $65,496.00 65496
2 $74,040.00 74040
3 $52,680.00 -1000 40384 92064

WORKINGS


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