Finance

4) Jefferson Products, Inc. is considering purchasing a new automatic press

brake, which costs $300,000 including installation and shipping. The machine

is expected to generate net cash flows of $80,000 per year for 10 years. At the

end of 10 years, the book value of the machine will be $0, and it is anticipated

that the machine will be sold for $100,000. If the press brake project is undertaken,

Jefferson will have to increase its net working capital by $75,000. When

the project is terminated in 10 years, there will be no need for this incremental

working capital, and it can be liquidated and made available to Jefferson

for other uses. Jefferson requires a 12 percent annual return on this type of

project and its marginal tax rate is 40 percent.

a. Calculate the press brake’s net present value.

NINV = $300,000 + $75,000 = $375,000

NCF1-9 = $80,000

NCF10 = $80,000 + $75,000 + $100,000 (1-.4) = $215,000

NPV = $80,000(PVIFA12, 9) + $215,000(PVIF12,10) -$375,000

= $80,000(5.328) + $215,000(0.322) - $375,000

= $120,470

Please see the attached excel sheet for calculations. The difference between the NPV figures is due to rounding error

b. Is the project acceptable?

The project is acceptable, because its NPV is positive

c. What is the meaning of the computed net present value figure?

The value of the firm, and therefore the shareholders’ wealth, is increased by $120,470 as a result of undertaking this project.

d. What is the project’s internal rate of return?

The IRR of this project is 18.71% using excel

e. For the press brake project, at what annual rates of return do the net present

value and internal rate of return methods assume that the net cash

inflows are being reinvested?

The net present value calculation assumes the net cash flows are reinvested at 12%, the project’s required return. The internal rate of return calculation assumes the net cash flows are reinvested at 18.71%, the project’s IRR.