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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