capital budgeting

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Jansen Manufacturing is evaluating the purchase of a new machine for a special project. The machine can be purchased for $550,000. Shipping and installation will be an additional 5% of the purchase price. The machine will be used for three years. At the end of three years the firm will end this project and sell the machine. The expected market value of the machine at the end of three years is $200,000. Jansen will need to increase accounts receivable by $40,000 and inventory by $60,000 at the start of this project. Funds tied up in net working capital will be recovered at the end of this 3-year project. Operation of the new machine will increase annual sales. revenues by $700,000. Operating costs will increase by $500,000 per year. The corporate tax rate is 21%. The cost of capital is 11% The machine will be depreciated using 3-year MACRS depreciation. The MACRS percentages are as follows: Year MACRS % 1 33.33% 2 44.45% 3 14.81% 4 7.41% 5. Calculate the operating cash flows for years 2 and 3. Then add all project cash flows (including cash flows calculated in problems 1-4) to the table below. Note that the year 3 cash flows include operating and non-operating cash flows. Year Total cash flow 0 1 2 3 6. Calculate NPV for the project, based on the cash flows in your table. Based on the NPV, should you accept or reject the project? Explain why you would accept or reject the project. 7. Calculate IRR for the project, based on the cash flows in your table. Based on the IRR, should you accept or reject the project? Explain why you would accept or reject the project. 8. Calculate PI for the project, based on the cash flows in your table. Based on the PI, should you accept or reject the project? Explain why you would accept or reject the project