Fm11 Ch 11 Mini Case

Thus, final free cash flows for the project come out to be $-3.750 million, $0.889 million, $2,563 million, $5,719 million and $2,388 million for years 2011, 2012, 2013, 2014 and 2015 years respectively.

To make the most informed decision the IRRs and payback periods of the projects should be compared in conjunction with the NPVs of the two projects. The NPV analysis of the two projects under consideration indicates that the MMDC Project is the better of the two projects.

Failure to handle these situations properly can lead to huge product liability suits and even bankruptcy.

5. What is the project’s MIRR? What is the difference between the IRR and the MIRR? Which is

Now we want to examine the analysis business report concerning the cost of capital that has been increased at 28% in accordance with the Net Present Value which is $500,000 the question being would still be worth it to make the investment to the company (Needles, 2010). While at the same time the internal rate of return is still at 21% which is lower than the 25% in the expenditures. In reflection of these calculations the investment would not

(TCO G) – (Ignore income taxes in this problem.) Tennessee Co. is considering the production of an exterior paint that will require the purchase of new mixing machinery. The machinery will cost $700,000, is expected to have a useful life of 12 years, and is expected to have a salvage value of $100,000 at the end of 12 years. The machinery will also need a $40,000 overhaul at the

See Table 1: Expected non-operating cash flow when the project is terminated at year 4 = 165,880$

Thus, by year three the company will be making a profit off the investment as year three is 86.73 million profit by 55.35 cost giving the company a 31.38 million dollar surplus. Generally, a period of payback of three year or less is acceptable (Reference Entry) causing this project to be viable based off the payback analysis. Although, these calculations are flawed. The reason for this is because the time value of money is not taken into effect when calculating payback periods which is where IRR can further assist in a more realistic financial picture (Reference Entry).

Calculate the Nominal Payback, the Discounted Payback, the Net Present Value and the IRR assuming:

The cash flow has been discounted at rate of 10%. The NPV is £ - 46,700 (negative)

The machine will have a depreciation of $140,000 for the first five years; this is determined by dividing the initial investment by five. The old machine will be sold in 2010 for $25,000 which is below the current book value of $36,000. This is why there is a capital gain of $3,850 that will add to the incremental savings plus the depreciation for that year. The new sheeter will be sold at the end of the last year for $120,000 which will be taxed at 35; this is why a cost of $42,000 appears for the last cash flow (Exhibit 1). The NPV is a positive $1,063,567 and the IRR is 36%, this shows that the project will add value to the company along with having a great return. The payback period for the project is 2.45…Using the growth rate of 3%, the sales are projected to be nearly doubled from 2009 with the new sheeter. However, Pitts believes that he would not be surprised to see them increase by 7% or

In the revised income statement, projected net income after taxes would significantly increase from $3,963K to $4,651K in 2011, and from $3,818K to $4,716K in 2012. This is predominantly driven by the sales growth of $21.6 million in 2011 and $28 million in 2012. Without this project, net income would have otherwise peaked in 2011 and decline in subsequent years. Thus, this investment

The use of an accounting rate of return also underscores a project 's true future profitability because returns are calculated from accounting statements that list items at book or historical values and are, thus, backward-looking. According to the ARR, cash flows are positive due to the way the return has been tabulated with regard to returns on funds employed. The Payback Period technique also reflects that the project is positive and that initial expenses will be retrieved in approximately 7 years. However, the Payback method treats all cash flows as if they are received in the same period, i.e. cash flows in period 2 are treated the same as cash flows received in period 8. Clearly, it ignores the time value of money and is not the best method employed. Conversely, the IRR and NPV methods reflect that The Super Project is unattractive. IRR calculated is less then the 10% cost of capital (tax tabulated was 48%). NPV calculations were also negative. We accept the NPV method as the optimal capital budgeting technique and use its outcome to provide the overall evidence for our final decision on The Super Project. In this case IRR provided the same rejection result; therefore, it too proved its usefulness. Despite that, IRR is not the most favorable method because it can provide false results in the case where multiple negative

This analysis will determine whether or not the project is worth pursuing using a net present value (NPV) approach.

The following paper analyzes a project from financial perspectives using the capital budgeting techniques like Net Present Value (NPV) and Internal Rate of Return (IRR).