Page1 / 4

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

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
BUSN 379 Project Part 2

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

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
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.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.
Ask a homework question - tutors are online