Accounting: Depreciation and Cash Flow

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(10-8) NPVs, IRRs, and MIRRs for Independent Projects
Edelman Engineering is considering including two pieces of equipment, a truck and an overhead pulley system, in this year’s capital budget. The projects are independent. The cash outlay for the truck is $17,100 and that for the pulley system is $22,430. The firm’s cost of capital is 14%. After-tax cash flows, including depreciation, are as follows:
Year Truck Pulley
1 $5,100 $7,500
2 $5,100 $7,500
3 $5,100 $7,500
4 $5,100 $7,500
5 $5,100 $7,500
Calculate the IRR, the NPV, and the MIRR for each project, and indicate the correct accept-reject decision for each. Year Truck Pulley
0 -$17,200 -$22,430
1 $5,100 $7,500
2 $5,100 $7,500
3 $5,100 $7,500
4 $5,100
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If company fails to adjust expected inflection on their cost of capital then the cost of capital which the company is using to discount expected cash flows will be lower than the inflection adjusted cost of capital. As company is using lower cost of capital rate to discount their cash flows, the discounted cash flow will be higher and calculated NPV will be lower.

Problem 11- 7
"New-Project Analysis"

You have been asked by the president of your company to evaluate the proposed acquisition of a new spectrometer for the firm’s R&D department. The equipment’s basic price is $70,000, and it would cost another $15,000 to modify it for special use by your firm. The spectrometer, which falls into the MACRS 3-year class, would be sold after 3 years for $30,000. Use of the equipment would require an increase in net working capital (spare parts inventory) of $4,000. The spectrometer would have no effect on revenues, but it is expected to save the firm $25,000 per year in before-tax operating costs, mainly labor. The firm’s marginal federal-plus-state tax rate is 40%.

a. What is the net cost of the spectrometer? (That is, what is the Year-0 net cash flow?)
b. What are the net operating cash flows in Years 1, 2, and 3? (26220,30300,20100)
c. What is the additional (nonoperating) cash flow in Year 3? 24380
d. If the project’s cost of capital is 10%, should the spectrometer be

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