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Course Project
Course Project
Finance
BUSN 379
DeVry of Anaheim
2/16/2012
Finance
BUSN 379
DeVry of Anaheim
2/16/2012
Part II
Course Project Part II
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.
Net Cash Flows
CF0 = -3,000,000
CF1 = 1,100,000
CF2 = 1,450,000
CF3 = 1,300,000
CF4 = 950,000
1. What is the project’s IRR?
* 22%
1,100,000/ (1+0.15) ^1 = 1,100,000/1.15 = 956,521.74
1,450,000/ (1+0.15) ^2 = 1,450,000/1.3225 = 1,096,408.32
1,300,000/ (1+0.15) ^3 = 1,300,000/1.52087 = 85, 4771.10
950,000/ (1+0.15) ^4 = 950,000/1.74901 = $543,165.58
2. What is the project’s NPV?
NPV Calculation
NPV = 956,521.74 + 1,096,408.32 + 854,771.1 + 543,165.58 -3,000,000
NPV = 3,450,866.74 -3,000,000
NPV = $450,866.74
3. Should the company accept this project and why (or why not)?
* The company should accept the project because the project have a positive NPV, the IRR is way over the company’s needed of rate of return, the annual rate of the project better than a prospect project that have less return, and by the time the project is done it will be completed within haft the time.
4. Explain how depreciation will affect the present value of the project.
* Depreciating is a method of allocating the cost of a project over its useful life, and it will decrease in the project value caused by unfavorable market conditions (Investopedia 2012).
References:
Investopedia Staff (2012)....