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Determine the following: Project's Profitability Index (PI), Project's NPV, IRR, Payback period using actual (raw) cash flows, Payback period using each year present value of
Determine the following: Project's Profitability Index (PI), Project's NPV, IRR, Payback period using actual (raw) cash flows, Payback period using each year present value of cash flows. Determine if the project should be accepted per calculation. Show calculation
Great Parts Corporation makes specialized cylinders for automobile engines and has noted an increase | ||||||||
demand in its products. The corporation plans on purchasing a new machine with an invoice price in the | ||||||||
amount of $550,000 from another manufacturer. Shipping charges will amount to $16,000, installation | ||||||||
costs will total $25,000, and testing charges for the new piece of equipment will be $4,200. Hence, the | ||||||||
the total cost of the machine is $595,200. | ||||||||
Company accountants have estimated the machine to have an estimated 6-year economic life; the machine | ||||||||
will be depreciated over a 6-year period using the straight-line method. Salvage value for the machine is | ||||||||
expected to be zero at the end of the 6th year. | ||||||||
Company management requires a 15% Required Rate of Return. The tax rate is 25%. | ||||||||
Sales estimates: | ||||||||
Company managers are comfortable with selling 2,200 units of the products produced by this machine in year 1 | ||||||||
at a sales price of $185 generating an annual sales revenue in year 1 in the amount of $407,000. Managers expect | ||||||||
sales to grow at a rate of 3% per year. | ||||||||
Costs estimates: | ||||||||
The management accountants expect the following cost estimates including annual increases as follows: | ||||||||
A) Labor and Maintenace Costs: | $ 85,000.00 | an annual increase of: | 4.0% | |||||
B) Utilities costs in the amount of: | $ 11,500.00 | an annual increase of: | 2.0% | |||||
C) Supplies costs in the amount of: | $ 22,000.00 | an annual increase of: | 3.0% | |||||
D) Incremental overhead costs: | $ 6,500.00 | an annual increase of: | 5.0% |
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