Busn 379 Course Project Part Ii

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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)....