Blackwell Pasta Company

Project 1

Assumptions

Sales 1,800,000

COGS(% on Sales) 60%

Capital Investment Cost 200,000

Sales increase by 8%

Savings on COGS 11%

Estimated Economic Life (Years) 5

Cost of Capital 15%

Tax 30%

A. Compute for payback period

Cost of Machine 200,000

Increase in Sales by 8% 144,000 (1,800,000 x 8%)

Decrease in COGS by 11% 118,800 (1,800,000x60% x 11%)

Tax Savings from Depreciation Tax Shield 12,000 (200,000/5*30%)

Cash inflow per year 274,800

Payback period Net cost of Initial Investment

Annual Net Cash Inflows

= 200,000

274,800

= 0.73 year

Decision rule : the shorter the payback period compare to company's standard the lesser the risk of the project

B. Compute for the NPV

Increase in Sales by 8% 144,000 (1,800,000 x 8%)

Decrease in COGS by 11% 118,800 (1,800,000x60% x 11%)

Tax Savings from Depreciation Tax Shield 12,000 (200,000/5*30%)

Cash inflow per year 274,800

YEAR Cash Inflows PVF PV of Cash Inflows

1 274,800 0.869565217 238,956.52

2 274,800 0.756143667 207,788.28

3 274,800 0.657516232 180,685.46

4 274,800 0.571753246 157,117.79

5 274,800 0.497176735 136,624.17

Total PV of Cash Inflows 921,172.22

Less: Cost of Investment 200,000.00

Net Present Value 721,172.22

Decision rule: Accept the project if NPV > 0

C Compute for the IRR

Increase in Sales by 8% 144,000 (1,800,000 x 8%)

Decrease in COGS by 11% 118,800 (1,800,000x60% x 11%)

Tax Savings from Depreciation Tax Shield 12,000 (200,000/5*30%)

Cash inflow per year 274,800

YEAR Cash Inflows PVF @ 135.50% PV of Cash Inflows

0 (200,000)

1 274,800 0.4246 116,686.27

2 274,800 0.1803 49,547.62

3 274,800 0.0766 21,039.03

4 274,800 0.0325 8,933.65...