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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. 1. What is the project’s IRR? (10 pts)
Answer:
Irr=iL+[(iU-iL)(npvL)]/[npvL-npvU]
Irr=0.19+[(0.24-0.19)(193484.61)]/[193484.61-86216.77]
Irr=0.19+[(0.05)(193484.61)]/[279701.38]
Irr=0.19+9674.2305/279701.38
Irr=0.19+0.0346
Irr=0.22446 or 22.46% 2. What is the project’s NPV? (15 pts)
Answer:
1,100,000/(1+0.15)^1=1,100,000/1.15=$956,521.74
1,450,000/(1+0.15)^2=1,450,000/1.3225=$1,096,408.32
1,300,000/(1+0.15)^3=1,300,000/1.52087=$854,771.10
950,000/(1+0.15)^4=950,000/1.74901=$543,165.58
$956,521.74+1,096,408.32+854,771.10+543,165.58=$3,450,866.74
$3,450,866.74-3,000,000=$450,866.74
NPV=$450,866.74
3. Should the company accept this project and why (or why not)? (5 pts)
Answer: Yes, I believe the company should accept this project. The company’s IRR is greater than the RRR and the NPV of $450,866.74 is a positive. Whenever the Irr is greater than the RRR or the NPV is zero or greater, the investment will earn a return greater than the RRR.
4. Explain how depreciation will affect the present value of
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)
Answer:
Irr=iL+[(iU-iL)(npvL)]/[npvL-npvU]
Irr=0.19+[(0.24-0.19)(193484.61)]/[193484.61-86216.77]
Irr=0.19+[(0.05)(193484.61)]/[279701.38]
Irr=0.19+9674.2305/279701.38
Irr=0.19+0.0346
Irr=0.22446 or 22.46% 2. What is the project’s NPV? (15 pts)
Answer:
1,100,000/(1+0.15)^1=1,100,000/1.15=$956,521.74
1,450,000/(1+0.15)^2=1,450,000/1.3225=$1,096,408.32
1,300,000/(1+0.15)^3=1,300,000/1.52087=$854,771.10
950,000/(1+0.15)^4=950,000/1.74901=$543,165.58
$956,521.74+1,096,408.32+854,771.10+543,165.58=$3,450,866.74
$3,450,866.74-3,000,000=$450,866.74
NPV=$450,866.74
3. Should the company accept this project and why (or why not)? (5 pts)
Answer: Yes, I believe the company should accept this project. The company’s IRR is greater than the RRR and the NPV of $450,866.74 is a positive. Whenever the Irr is greater than the RRR or the NPV is zero or greater, the investment will earn a return greater than the RRR.
4. Explain how depreciation will affect the present value of