airjet - A few months have now passed and AirJet Best...

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A few months have now passed and AirJet Best Parts, Inc. is considering the purchase on a new machine that will increase the production of a special component significantly. The anticipated cash flows for the project are as follows: Year 1 $1,100,000 Year 2 $1,450,000 Year 3 $1,300,000 Year 4 $950,000 You have now been tasked with providing a recommendation for the project based on the results of a Net Present Value Analysis. Assuming that the required rate of return is 15% and the initial cost of the machine is $3,000,000. 1. What is the project’s IRR? (10 pts) 2. What is the project’s NPV? (15 pts) 3. Should the company accept this project and why (or why not)? (5 pts) 4. Explain how depreciation will affect the present value of the project. (10 pts) 5. Provide examples of at least one of the following as it relates to the project: (5 pts each) a. Sunk Cost b. Opportunity cost c. Erosion 6. Explain how you would conduct a scenario and sensitivity analysis of the project. What would be some project-specific risks and market risks related to this project? (20 pts)
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Year Initial cost -3,000,000 Cash flow 1 1,100,000 2 1,450,000 3 1,300,000 4 950,000 IRR 22%
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Year Initial cost -3,000,000 Rate of return 15% Cash flow 1 1,100,000 2 1,450,000 3 1,300,000 4 950,000 NPV 450866.74
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As the NPV is positive, it is worthwile to invest in the project. Therefore, project should be accepted.
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Depreciation does not directly affect the cash flows, but they indirectly affect the after -tax cash flow because the firms deduct depreciation expenses on tax which reduces cash outflow after taxes. When cash outflow after tax is reduced, the net present value is increased.
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a) Sunk cost - Sunk cost is a cost that has been incurred in the past and cannot be recovered irrespective of whether the project the accepted or not. Example - Research and Develpoment cost incurred on the the new project. b) The cash flows that can be generated from an asset that the firm already owns. Example - The same second-hand machine is available in a good condition and at a low price.
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This note was uploaded on 12/12/2011 for the course ECONOMIC acc 101 taught by Professor Xyz during the Spring '11 term at University of Phoenix.

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airjet - A few months have now passed and AirJet Best...

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