AAA Shop is considering a project to improve their production efficiency. They are trying to decide whether it is a good idea or not to buy an automated injection molding machine which will result in reducing pre-tax costs by $500,000 for each of the next three years. The molding machine will cost $1,000,000 and the IRS says it must be depreciated as 3-year MACRS equipment. AAA Shop believes they can sell the machine for $90000 at the end of three years. The molding machine will require an initial investment to increase inventory by $26000, and then an additional inventory increase of $3,000 for each succeeding year of the project. AAA's tax rate is 35% and uses a discount rate of 14%. AAA already spent $5,000 investigating the feasibility of using the machine. Ilyear 3-year MACRS 33.33% 2 144.44% 14.82% 14 7.41% 13 Do NOT enter your answer in the answer box above. Please just leave it blank. Please show your detailed work to find the NPV and IRR of the project, and send it to your professor at qwang@kean.edu Make sure that your work shows the answers to the following questions. 1. What is the $5,000 that AAA already spent investigating the feasibility of using the machine? a. opportunity cost b. incremental cash flows C. sunk cost d. salvage value e. financing cost 2. What is the change in networking capital at the end of the project? 3. What are the depreciations every year? 4. What is the book value of the machine at the end of the project? 4. What is the book value of the machine at the end of the project? 5. What is the after-tax salvage value of the equipment at the end of the project? 6. What are the operating cash flows (OCF) every year? 7. What are the cash flows from assets (CFFA) every year? 8. What is the NPV and IRR of the project? Should AAA shop accept the project? Why? AAA Shop is considering a project to improve their production efficiency. They are trying to decide whether it is a good idea or not to buy an automated injection molding machine which will result in reducing pre-tax costs by $500,000 for each of the next three years. The molding machine will cost $1,000,000 and the IRS says it must be depreciated as 3-year MACRS equipment. AAA Shop believes they can sell the machine for $90000 at the end of three years. The molding machine will require an initial investment to increase inventory by $26000, and then an additional inventory increase of $3,000 for each succeeding year of the project. AAA's tax rate is 35% and uses a discount rate of 14%. AAA already spent $5,000 investigating the feasibility of using the machine. Ilyear 3-year MACRS 33.33% 2 144.44% 14.82% 14 7.41% 13 Do NOT enter your answer in the answer box above. Please just leave it blank. Please show your detailed work to find the NPV and IRR of the project, and send it to your professor at qwang@kean.edu Make sure that your work shows the answers to the following questions. 1. What is the $5,000 that AAA already spent investigating the feasibility of using the machine? a. opportunity cost b. incremental cash flows C. sunk cost d. salvage value e. financing cost 2. What is the change in networking capital at the end of the project? 3. What are the depreciations every year? 4. What is the book value of the machine at the end of the project? 4. What is the book value of the machine at the end of the project? 5. What is the after-tax salvage value of the equipment at the end of the project? 6. What are the operating cash flows (OCF) every year? 7. What are the cash flows from assets (CFFA) every year? 8. What is the NPV and IRR of the project? Should AAA shop accept the project? Why
