Question

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 %.

Answer 1

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