Question
A new operations system requires an initial investment of $120,000 and will generate $70,000 in revenue in year 1. The system will incur $50,000 in
A new operations system requires an initial investment of $120,000 and will generate $70,000 in revenue in year 1. The system will incur $50,000 in general expenses from the first year. The asset is classified as a 5-year MACRS property for depreciation purposes. The expected salvage value is $8,000 at the end of the project life. The firm pays taxes at a rate of 20% and has a MARR of 15%. The project has a 6-year life. Revenue will increase at 10% each year and expenses will increase at 7% each year. A loan is to be taken out for 5% of the initial investment amount. The loan will be repaid over the project life in equal payments, at an interest rate of 8%. Calculate the following: d. Create the Income Statement [5 points] e. Develop a Cash Flow Statement [5 points] f. Is this project justifiable at a MARR of 15%? Calculate the NPV [1 point] Calculate IRR [1 point] State your conclusions. [1 point]
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