Busn 379 project part 2

BUSN 379 Project Part 2
Download Document
Showing pages : 1 - 2 of 4
This preview has blurred sections. Sign up to view the full version! View Full Document
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: 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 firms 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 projects IRR? (10 pts) Using a financial calculator or a trial and error approach the IRR should be approximately 22%. 2. What is the projects 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. ...
View Full Document