1) Project Valuation Tools Problem

ACME Company is interested in buying a new machine that costs $500,000. It is projected that sales for the first year will be $350,000 and will increase each year by 15%. Variable costs are estimated to be 60% of sales with a one time repair cost of $25,000 in year 4. The machine will have a useful life of5 years, the tax rate = 33% and the discount rate is 10%. Using the valuation tools youve learned (payback, discounted payback, NPV, IRR, PI), recommend if the company should invest in this machine.

2Valuation Problem

CalculateNPV andIRR for the following investment.

Initial investment = $1,000,000 machine, the project term is 6 years, sales for year 1 are estimated to be $1,000,000, and will grow by 7.5% per year through year 5, sales for year 6 = $500,000, variable costs are estimated to be 30% of sales & fixed costs are 150,000 per year, at the end of year 6 the machinery will become obsolete and will be sold for $100,000, the machine is considered 7-year property under the MACRS rules, the companys tax rate is 40%, and the discount rate is 12%.