BUSN379_Course_Project_Part_II - Course Project Part II...

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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 4) and (2) the firm’s cost of capital (Task 5). 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) The internal rate of return is 22.4% for this project. 2. What is the project’s NPV? (15 pts) The net present value of the project is $450,866.9. 3. Should the company accept this project and why (or why not)? (5 pts) I do think the company should accept this project, because when NPV of a prospective project is positive, it should be accepted. If NPV is negative, the project should probably be rejected because cash flows will also be negative. Therefore since the NPV is 459,866.9, which is positive, also it is a very good amount of comparison to the value of a dollar today to the value of that same dollar in the future. 4. Explain how depreciation will affect the present value of the project. (10 pts) Depreciation is used to match the expense of an asset to the income that the asset helps the company earn. Depreciation is the decrease in value of assets. The more value as depreciated the less cash flow a company will have. For tax purposes, businesses can deduct the cost of the tangible assets they purchase as business expenses. Depreciation does bring a positive effect on project, come to tax deduction. 5. Provide examples of at least one of the following as it relates to the project: (5 pts each) a. Sunk Cost If AirJet invested $3,000,000 in a machine that will not bring any gain to the company, the cost of this machine will be sunk cost. b.
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This note was uploaded on 03/18/2012 for the course BUS 379 taught by Professor Jones during the Spring '11 term at DeVry Arlington.

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BUSN379_Course_Project_Part_II - Course Project Part II...

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