Finance Course Project
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
0 $ (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
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
0 $ (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