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Pame la Randolph PROBLEM 2 Given Investment cost (today) Project life Salvage Value Waste disposal cost savings per year Labor cost savings per year...

Eco-Bags Co. manufactures recyclable plastic bags. Given anticipated increase in demand for recyclable plastic bags, its management considers purchasing a new plastic waste processing machine.

The proposed machine costs $750,000 and it will have a five year anticipated life and will be depreciated using MACRS depreciation method toward a zero salvage value (MACRS depreciation rates are: Year 1: 33.33%, Year 2: 44.45%, Year 3: 14.81% and Year 4: 7.41%). However, the plant will be able to sell the machine in the after-market for 25% of its original costs at the end of year 5. The firm estimates that the installation of the machine will bring annual costs savings of $40,000 per year from reduced waste disposal costs, $50,000 from reduced labor costs, and $110,000 per year from the sales of reclaimed waste net of selling expenses. The company requires a 10% rate of return from its investment and faces a 35% tax rate (the company is profitable).

a. Calculate the NPV and IRR for the project. Should the company invest in this machine?
Pamela Randolph PROBLEM 2 Given MACRS Depreciation: Solution Legend Investment cost (today) $(750,0 0) Year 1 3 .3 % = Value given in problem Project life 5 years Year 2 4 .45% = Formula/Calculation/Analysis required Salvage Value 25% of original cost Year 3 14.81% = Qualitative analysis or Short answer required Waste disposal cost savings per yea $40,0 0 Year 4 7.41% = Goal Se k or Solver cel Labor cost savings per year $50,0 0 Sale of reclaimed plastic waste $1 0,0 0 Required rate of return 10% Tax rate 35% Problem – 2 (30 points) Solution Eco-Bags Co. manufactures recyclable plastic bags. Given anticipated increase in demand for recyclable plastic bags, its management considers purchasing a new plastic waste proces ing machine. a. Year Cash flow estimation 0 1 2 3 4 5 The proposed machine costs $750,0 0 and it wil have a five year anticipated life and wil be depreciated using MACRS depreciation method toward a zero salvage value (MACRS depreciation rates are: Year 1: 3 .3 %, Year 2: 4 .45%, Year 3: 14.81% and Year 4: 7.41%). However, the plant wil be able to sel the machine in the after-market for 25% of its original costs at the end of year 5. The firm estimates that the instal ation of the machine wil bring an ual costs savings of $40,0 0 per year from reduced waste disposal costs, $50,0 0 from reduced labor costs, and $1 0,0 0 per year from the sales of reclaimed waste net of sel ing expenses. The company requires a 10% rate of return from its investment and faces a 35% tax rate (the company is p Investment $(750,0 0) Waste disposal cost savings per year a. Calculate the NPV and IR for the project. Should the company invest in this machine? Labor cost savings per year Proce ds from sale of reclaimed waste materials The manager of the plant raised some concerns about the revenues from the sale of reclaimed waste. She projects that the revenues from these sales could be 10% to 50% les than what was projected. However, the savings from reduced labor costs and reduced waste disposal costs would remain same. She presented the fol owing probability distribution on the projected reclaimed plastic sales: Incremental EBITDA Probability Distribution of reclaimed plastic sales: Les : Depreciation Scenario Probability Incremental EBIT Remain as projected 40% Les : Taxes Decrease by 10% 25% NOPAT Decrease by 30% 20% Plus: Depreciation Decrease by 50% 15% Cash from Salvage Value F CF $- NPV $- c. At what sales volume of reclaimed waste materials, the company would have a break-even NPV=0? IR Analysis NPV is positive. - the project should …be used b. Probability Distribution of reclaimed plastic sales: Remain as projected 40% Decrease by 10% 25% Decrease by 30% 20% Decrease by 50% 15% Total 10 % i) Scenario-1: 10% decrease in sales of reclaimed plastic waste: Year Cash flow estimation 0 1 2 3 4 5 Investment $(750,0 0) Waste disposal cost savings per year Labor cost savings per year Proce ds from sale of reclaimed waste materials Ad itional EBITDA Les : Depreciation Ad itional EBIT Les : Taxes NOPAT Plus: Depreciation Cash from Salvage Value F CF NPV IR i ) Scenario-1: 30% decrease in sales of reclaimed plastic waste: Year Cash flow estimation 0 1 2 3 4 5 Investment $(750,0 0) Waste disposal cost savings per year Labor cost savings per year Proce ds from sale of reclaimed waste materials Ad itional EBITDA Les : Depreciation Ad itional EBIT Les : Taxes NOPAT Plus: Depreciation Cash from Salvage Value F CF NPV IR i ) Scenario-1: 50% decrease in sales of reclaimed plastic waste: Year Cash flow estimation 0 1 2 3 4 5 Investment $(750,0 0) Waste disposal cost savings per year Labor cost savings per year Proce ds from sale of reclaimed waste materials Ad itional EBITDA Les : Depreciation Ad itional EBIT Les : Taxes NOPAT Plus: Depreciation Cash from Salvage Value F CF NPV IR Expected NPV: NPV is …. - the project should … c. B-E Sales of Reclaimed Plastic Waste: Using Goal Se k Cash flow estimation 0 1 2 3 4 5 Investment $(750,0 0) Waste disposal cost savings per year Labor cost savings per year Proce ds from sale of reclaimed waste materials Ad itional EBITDA Les : Depreciation Ad itional EBIT Les : Taxes NOPAT Plus: Depreciation Cash from Salvage Value F CF NPV IR b. Estimate the NPV and IR for each of these scenarios. Estimate the expected NPV, which is equal the weighted average sum of NPVs under each scenario weighted (multiplied) by the probability of a given scenario. Should the company invest in the machine under this revised analysis?
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