BUSN 379 Project Part 2 - Introduction You will assume that...

BUSN 379 Project Part 2
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Introduction You will assume that you still work as a financial analyst for AirJet Best Parts, Inc. The company is considering a capital investment in a new machine and you are in charge of making a recommendation on the purchase based on (1) a given rate of return of 15% (Task 5) and (2) the firm’s cost of capital (Task 6). Task 4. Capital Budgeting for a New Machine 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) Using a financial calculator or a trial and error approach the IRR should be approximately 22%. 2. What is the project’s NPV? (15 pts) ($1,100,000/1.15)+($1,450,000/1.15)^2+($1,300,000/1.15)^3+ ($950,000/1.15)^4-3,000,000 = $450,867 3. Should the company accept this project and why (or why not)? (5 pts) Yes, since NPV>0 4. Explain how depreciation will affect the present value of the project. (10 pts) Answers will vary, students need to recognize depreciation is not a cash flow, but would affect the tax amount paid on inflows from the project. 5.
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