BUSN 379 Project Part 2

BUSN 379 Project Part 2 - Course Project Part II...

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Unformatted text preview: Course Project Part II 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. Required rate of return 15% Year Cash Flow $ (3,000,000) 1 $ 1,100,000 2 $ 1,450,000 3 $ 1,300,000 4 $ 950,000 1. What is the project’s IRR? (10 pts) = 22.38% 2. What is the project’s NPV? (15 pts) = $450,867.00 Computation of Net Present Value Year Cash Flow Present Factor @ 15% Present Value 1 $ 1,100,000 0.8696 $ 956,522. 2 $ 1,450,000 0.7561 $1,096,408. 3 $ 1,300,000 0.6575 $854,771. 4 $ 950,000 0.5718 $543,166. Total = $3,450,867. Less: Initial cost = $(3,000,000) NPV = $450,867.00 Formula: Cash Flow x Present Factor @ 15% = Present Value 1100000x 0.869565217391304= 956521.739130435 1450000x 0.756143667296787= 1096408.31758034 1300000x 0.657516232431988= 854771.102161585 950000x 0.571753245593033= 543165.583313382 Total = 3450866.74218574 Less Initial Cost = -3000000 NPV = $450,867.00 3. Should the company accept this project and why (or why not)? (5 pts) Yes. In looking at the overall analysis of the project, I believe it would be beneficial to accept the project because, the projects (IRR) Internal Rate Return is greater than the (RRR) Required Rate of Return and the overall (NPV) Net Present Value is positive or gain....
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This note was uploaded on 03/29/2012 for the course BUS 379 taught by Professor Gilbert during the Spring '12 term at DeVry Houston.

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BUSN 379 Project Part 2 - Course Project Part II...

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