ACCTG 231 - Spring 2021 Comprehensive Problem #2 Due, Monday, April 19th; 11:59 pm Gallatin, Inc., is deciding between investing in one of two machines in order to take on a new project. Each of the machines has an 8 year life. At the end of the 8 years, the machine will be sold at salvage value. Working capital is invested in the project immediately and reverts back to the company for use elsewhere at the end of the project's life. Additionally, the machine used for project A will require a cash expenditure for a major overhaul at the end of 3 years. A summary of the information related to each of the investments is presented below. Project A Project B Annual cash sales (for each of the 8 years) $250,000 $400,000 Annual cash expenses (for each of the 8 years) $130,000 $250,000 Annual depreciation on new equipment (for each of the 8 years) $ 70,000 $ 93,750 Initial cost of new equipment $600,000 $800,000 Salvage value of new equipment in 8 years $_40.000 $ 60,000 Working capital requirement $ 80,000 $120,000 Cost to overhaul new machine $ 25.000 1. Assuming Gallatin's discount rate is 8%, compute the net present value (NPV) of each of the projects & state which project is preferable from an NPV perspective. To receive credit, present your work in a manner that demonstrates your understanding of the inflows and outflows (i.e. do not just provide an answer). (6 points) . I recommend using the Excel spreadsheet template attached to this assignment. If you do so: Be sure to label any rows added. Indicate (perhaps highlight) which number is the final answer for each project, State (type in) which project is preferable. . 2. Compute the Internal rate of return (IRR) on each of the projects & state which project is preferable from an IRR perspective. Round your interest rate to two decimal places after the whole number i.e. 2.33%). (4 points) I recommend using the Excel spreadsheet template attached to this assignment. If you do so: Be sure to label any rows added Indicate (perhaps highlight) which number is the final answer for each project. F H L M N 0 PROJECT A NET PRESENT VALUE Now Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year Year 9 Year 10 Total Net Present Value of Future Cash Flows 0.00 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 PROJECT B NET PRESENT VALUE Now Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Total Net Present Value of Future Cash Flows 0.00 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1 QUESTION #1 2 Discount Rate 4 5 Initial Investment 7 Annual Cost Savings 8 Salvage Value 9 Net Cash Inflows (Outflows) 10 Discount Rate 11 Present Value of Cash Flows 12 13 14 15 16 17 Initial investment 18 Annual Cost Savings 19 Salvage Value 20 Net Cash Inflows (Outflows) 21 Discount Rate 22 Present Value of Cash Flows 23 24 25 QUESTION #2 26 27 28 Discount Rate 29 30 31 Initial Investment 32 Annual Cost Savings 33 Salvace Value 34 Net Cash Inflows (Outflows) 35 Discount Rate 36 Present Value of Cash Flows 37 38 39 40 Discount Rate 41 42 43 Initial Investment 44 Annual Cost Savings 45 Salvage Value 46 Net Cash Inflows (Outflows) 47 Discount Rate 48 Present Value of Cash Flows 49 PROJECT A IRR Now Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Total Net Present Value of Future Cash Flows 0.00 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 PROJECT B 1RR Now Year 1 Year 2 Year 3 Year 4 Year 5 Year Year 7 Year & Year 9 Year 10 Total Net Present Value of Future Cash Flows 0.00 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 - ACCTG 231 - Spring 2021 Comprehensive Problem #2 Due, Monday, April 19th; 11:59 pm Gallatin, Inc., is deciding between investing in one of two machines in order to take on a new project. Each of the machines has an 8 year life. At the end of the 8 years, the machine will be sold at salvage value. Working capital is invested in the project immediately and reverts back to the company for use elsewhere at the end of the project's life. Additionally, the machine used for project A will require a cash expenditure for a major overhaul at the end of 3 years. A summary of the information related to each of the investments is presented below. Project A Project B Annual cash sales (for each of the 8 years) $250,000 $400,000 Annual cash expenses (for each of the 8 years) $130,000 $250,000 Annual depreciation on new equipment (for each of the 8 years) $ 70,000 $ 93,750 Initial cost of new equipment $600,000 $800,000 Salvage value of new equipment in 8 years $_40.000 $ 60,000 Working capital requirement $ 80,000 $120,000 Cost to overhaul new machine $ 25.000 1. Assuming Gallatin's discount rate is 8%, compute the net present value (NPV) of each of the projects & state which project is preferable from an NPV perspective. To receive credit, present your work in a manner that demonstrates your understanding of the inflows and outflows (i.e. do not just provide an answer). (6 points) . I recommend using the Excel spreadsheet template attached to this assignment. If you do so: Be sure to label any rows added. Indicate (perhaps highlight) which number is the final answer for each project, State (type in) which project is preferable. . 2. Compute the Internal rate of return (IRR) on each of the projects & state which project is preferable from an IRR perspective. Round your interest rate to two decimal places after the whole number i.e. 2.33%). (4 points) I recommend using the Excel spreadsheet template attached to this assignment. If you do so: Be sure to label any rows added Indicate (perhaps highlight) which number is the final answer for each project. F H L M N 0 PROJECT A NET PRESENT VALUE Now Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year Year 9 Year 10 Total Net Present Value of Future Cash Flows 0.00 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 PROJECT B NET PRESENT VALUE Now Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Total Net Present Value of Future Cash Flows 0.00 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1 QUESTION #1 2 Discount Rate 4 5 Initial Investment 7 Annual Cost Savings 8 Salvage Value 9 Net Cash Inflows (Outflows) 10 Discount Rate 11 Present Value of Cash Flows 12 13 14 15 16 17 Initial investment 18 Annual Cost Savings 19 Salvage Value 20 Net Cash Inflows (Outflows) 21 Discount Rate 22 Present Value of Cash Flows 23 24 25 QUESTION #2 26 27 28 Discount Rate 29 30 31 Initial Investment 32 Annual Cost Savings 33 Salvace Value 34 Net Cash Inflows (Outflows) 35 Discount Rate 36 Present Value of Cash Flows 37 38 39 40 Discount Rate 41 42 43 Initial Investment 44 Annual Cost Savings 45 Salvage Value 46 Net Cash Inflows (Outflows) 47 Discount Rate 48 Present Value of Cash Flows 49 PROJECT A IRR Now Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Total Net Present Value of Future Cash Flows 0.00 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 PROJECT B 1RR Now Year 1 Year 2 Year 3 Year 4 Year 5 Year Year 7 Year & Year 9 Year 10 Total Net Present Value of Future Cash Flows 0.00 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000