Finance Week 6
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) Using the financial calculations in Microsoft Excel, the IRR is 22%.
2. What is the project’s NPV? (15 pts) Using our formula and double checked with Microsoft Excel, NPV = (1,100,000/1.15) + (1,450,000/1.15)^2 + (1,300,000/1.15)^3 + (950,000/1.15) ^ 4 – 3,000,000 = $450,866.74
3. Should the company accept this project and why (or why not)? (5 pts) The company should accept this project because its net present value is greater than zero.
4. Explain how depreciation will affect the present value of the project. (10 pts)
Depreciation is not considered a cash flow, but it does generally reduce a company’s tax liability. Reducing a company’s tax liability would cause an increase in the present value of the project.
5. Provide examples of at least one of the following as it relates to the project: (5 pts each)
a. Sunk Cost: AirJet hiring a consulting group to come in and evaluate the utility and feasibility of acquiring a new machine. Even if AirJet does not get the new machine, this
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) Using the financial calculations in Microsoft Excel, the IRR is 22%.
2. What is the project’s NPV? (15 pts) Using our formula and double checked with Microsoft Excel, NPV = (1,100,000/1.15) + (1,450,000/1.15)^2 + (1,300,000/1.15)^3 + (950,000/1.15) ^ 4 – 3,000,000 = $450,866.74
3. Should the company accept this project and why (or why not)? (5 pts) The company should accept this project because its net present value is greater than zero.
4. Explain how depreciation will affect the present value of the project. (10 pts)
Depreciation is not considered a cash flow, but it does generally reduce a company’s tax liability. Reducing a company’s tax liability would cause an increase in the present value of the project.
5. Provide examples of at least one of the following as it relates to the project: (5 pts each)
a. Sunk Cost: AirJet hiring a consulting group to come in and evaluate the utility and feasibility of acquiring a new machine. Even if AirJet does not get the new machine, this