Your company is considering an expansion into a new product area. The company has collected the following information about the proposed product. (Note: You may or may not need to use all of this information, use only the information that is relevant.) The project has an anticipated economic life of 5 years. The company will have to purchase a new machine to produce the product. The machine has an up-front cost (T = 0) of $750,000. The machine will be depreciated on a straight-line basis over 5 years (that is, the company's depreciation expense will be $150,000 in each of the first five years (T = 1, 2, 3, 4, and 5). The company anticipates that the machine will last for at least five years, and that after five years, its before-tax salvage value will equal $100,000. If the company goes ahead with the project, it will have an effect on the company's net working capital. At the outset, T = 0, inventory will increase by $50,000 and accounts payable will increase by $30,000. At T = 5, the net working capital will be recovered after the project is completed. The project is expected to produce EBIT of $200,000 the first year (T = 1), $300,000 the second and third years (T = 2 and 3), $200,000 the fourth year (T = 4), and $150,000 the final year (T = 5). These values already include operating costs that are expected to equal 50 percent of sales revenue and depreciation expense. The company's interest expense each year will be $80,000. Because of synergies, the new project is expected to increase the after-tax cash flows of the company's existing products by $25,000 a year (T = 1, 2, 3, 4, and 5) and this is considered to be incremental to this particular project. The company's overall WACC is 12 percent. However, the proposed project is less risky than the average project, leading the firm to use a WACC of 10 percent for this project. The company's tax rate is 40 percent. What are the NPV and the IRR for this project? Group of answer choices NPV = $465,703.83 and IRR = 30.05% NPV = $467,227.83 and IRR = 30.45% NPV = $469,652.83 and IRR = 30.85% NPV = $471,386.83 and IRR = 31.25% NPV = $473,993.83 and IRR = 31.65%

Your company is considering an expansion into a new product area. The company has collected the following information about the proposed product. (Note: You may or may not need to use all of this information, use only the information that is relevant.) The project has an anticipated economic life of 5 years. The company will have to purchase a new machine to produce the product. The machine has an up-front cost (T = 0) of $750,000. The machine will be depreciated on a straight-line basis over 5 years (that is, the company's depreciation expense will be $150,000 in each of the first five years (T = 1, 2, 3, 4, and 5). The company anticipates that the machine will last for at least five years, and that after five years, its before-tax salvage value will equal $100,000. If the company goes ahead with the project, it will have an effect on the company's net working capital. At the outset, T = 0, inventory will increase by $50,000 and accounts payable will increase by $30,000. At T = 5, the net working capital will be recovered after the project is completed. The project is expected to produce EBIT of $200,000 the first year (T = 1), $300,000 the second and third years (T = 2 and 3), $200,000 the fourth year (T = 4), and $150,000 the final year (T = 5). These values already include operating costs that are expected to equal 50 percent of sales revenue and depreciation expense. The company's interest expense each year will be $80,000. Because of synergies, the new project is expected to increase the after-tax cash flows of the company's existing products by $25,000 a year (T = 1, 2, 3, 4, and 5) and this is considered to be incremental to this particular project. The company's overall WACC is 12 percent. However, the proposed project is less risky than the average project, leading the firm to use a WACC of 10 percent for this project. The company's tax rate is 40 percent. What are the NPV and the IRR for this project? Group of answer choices NPV = $465,703.83 and IRR = 30.05% NPV = $467,227.83 and IRR = 30.45% NPV = $469,652.83 and IRR = 30.85% NPV = $471,386.83 and IRR = 31.25% NPV = $473,993.83 and IRR = 31.65%

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter11: Cash Flow Estimation And Risk Analysis

Section: Chapter Questions

Problem 1eM

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The project has an anticipated economic life of 5 years.
The company will have to purchase a new machine to produce the product. The machine has an up-front cost (T = 0) of $750,000. The machine will be depreciated on a straight-line basis over 5 years (that is, the company's depreciation expense will be $150,000 in each of the first five years (T = 1, 2, 3, 4, and 5). The company anticipates that the machine will last for at least five years, and that after five years, its before-tax salvage value will equal $100,000.
If the company goes ahead with the project, it will have an effect on the company's net working capital. At the outset, T = 0, inventory will increase by $50,000 and accounts payable will increase by $30,000. At T = 5, the net working capital will be recovered after the project is completed.
The project is expected to produce EBIT of $200,000 the first year (T = 1), $300,000 the second and third years (T = 2 and 3), $200,000 the fourth year (T = 4), and $150,000 the final year (T = 5). These values already include operating costs that are expected to equal 50 percent of sales revenue and depreciation expense.
The company's interest expense each year will be $80,000.
Because of synergies, the new project is expected to increase the after-tax cash flows of the company's existing products by $25,000 a year (T = 1, 2, 3, 4, and 5) and this is considered to be incremental to this particular project.
The company's overall WACC is 12 percent. However, the proposed project is less risky than the average project, leading the firm to use a WACC of 10 percent for this project.
The company's tax rate is 40 percent.

What are the NPV and the IRR for this project?

Group of answer choices

NPV = $465,703.83 and IRR = 30.05%

NPV = $467,227.83 and IRR = 30.45%

NPV = $469,652.83 and IRR = 30.85%

NPV = $471,386.83 and IRR = 31.25%

NPV = $473,993.83 and IRR = 31.65%

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