Capital Budgeting:

Problem 1: (80 pts) The Todd Company is examining purchasing a new piece of equipment. 7 The old system is currently one year old and had an original production life of sx years. It had cost $1,100,000 and was depreciated using 100% bonus as 7-year MACRS. Todd estimated that it could be sold for $50,000 at the end of its production life and this is still true. The new will take one year to build and install and require an investment of $450,000 today and $1,300,000 one year from now. It will have a production life of four years and be depreciated using 100% bonus as 7-year MACRS. We will also increase working capital by $50,000 when it is ready for use. The old is projected to produce cash revenue of $1,000,000 this coming year and that will decrease 15% per year for the rest of its production life. Cash expenses are expected to be $500,000 this coming year and that will decrease 10% per year throughout its remaining production life. The old will be used until the new is put in service. The new will produce cash revenue $800,000 its first year of production, $1,500,000 its second year, $1,800,000 its third year and $1,000,000 its last year. Cash expenses are expected to be 40% of revenue (not including depreciation and taxes). We expect to sell it for $500,000 at the end of its production life. We estimate we can sell the working capital for $50,000 at that time. We estimate that the old could be sold for $420,000 when the new is ready for use. Todd requires a 12% return on this project and has a 30% tax rate. Based on net present value, should you purchase the new system? SHOW ALL WORK!!!!! The IRR on this project would be: Problem 1: (80 pts) The Todd Company is examining purchasing a new piece of equipment. 7 The old system is currently one year old and had an original production life of sx years. It had cost $1,100,000 and was depreciated using 100% bonus as 7-year MACRS. Todd estimated that it could be sold for $50,000 at the end of its production life and this is still true. The new will take one year to build and install and require an investment of $450,000 today and $1,300,000 one year from now. It will have a production life of four years and be depreciated using 100% bonus as 7-year MACRS. We will also increase working capital by $50,000 when it is ready for use. The old is projected to produce cash revenue of $1,000,000 this coming year and that will decrease 15% per year for the rest of its production life. Cash expenses are expected to be $500,000 this coming year and that will decrease 10% per year throughout its remaining production life. The old will be used until the new is put in service. The new will produce cash revenue $800,000 its first year of production, $1,500,000 its second year, $1,800,000 its third year and $1,000,000 its last year. Cash expenses are expected to be 40% of revenue (not including depreciation and taxes). We expect to sell it for $500,000 at the end of its production life. We estimate we can sell the working capital for $50,000 at that time. We estimate that the old could be sold for $420,000 when the new is ready for use. Todd requires a 12% return on this project and has a 30% tax rate. Based on net present value, should you purchase the new system? SHOW ALL WORK!!!!! The IRR on this project would be