Evaluation of this project through PAY BACK PERIOD, NPV, IRR and PROFITABILITY INDEX
Do all work here and resubmit.
A firm is looking at replacing four old packaging machines with one state of the art machine.
It will be able to produce the more with six less employess. The new equipment cost is $5,000,000
and it will cost $90,000 in shipping and $280,000 to install it. Also the employees will have
to be trained with training costs of $20,000. If this piece of equipment will increase sales by
5% (current sales are $23,000,000 per year) for the next three years and 3.5% for the following three
years, save the cost of six employees with wages and benefits of approximately $70,000 each,
decrease utility costs by $15,000 per year. The old equipment was depreciated straight line over 10 years
original depreciable expense was $700,000 per machine. They are 7 years old and could be sold for
$250,000 today. The new piece of equipment will be depreciated for 10 years straightline and has no salvage value.
Should the company purchase the equipment?
If the cost of raising capital is 7% for flotation costs, debt would be issued at 8.5% for 10 years at a price of
$965, the company currently pays a $5.10 dividend on all types of stock. Par value of preferred is $48.25
Current stock price is $86.50 and company has experienced a 3% growth rate but does not grow its dividends.
The company will raise as much as it can in debt - keeping the current capital structure of:
debt=45%, equity=55% (10% preferred stock, common stock 35%, retained earnings 10%) with a tax rate of 40%
Initial outlay:
Cost of equipment
shipping
installation
depreciable expense
training
Total outlay
Capital gain/loss other equipment
Book value
on books
Market value
capital gain
tax on gain
Net proceeds from sale
Initial outlay:
After tax cash flows	Years 1-3	Years 4-6
Changes in receipts:
increase sales
Total receipts
Changes in disbursements
decrease in salaries
decrease utility
Before tax cash flow
Depreciation
Taxable cash flow
taxes
after tax cash flow
Payback Period
Initial Outlay
year one-ATCF
remaining
Year two-ATCF
remaining
Year three-ATCF
remaining
Year four-ATCF
remaining
Year five-ATCF
remaining
Year six-ATCF
remaining
Payback Period
Net Present Value
Cost of Capital
cost of debt before tax
Price after flotation
Annual Debt before tax
After tax Debt Cost
Cost of Preferred stock
Net Proceeds
Cost of Preferred stock
Cost of New Common stock
Net Proceeds
Cost of External Equity
Cost of Retained earnings
Weighted Cost of Capital
Net Present Value
Initial Outlay
cash flow 1
Cash flow 2
Cash flow 3
Cash Flow 4
Cash Flow 5
Cash flow 6
Discount Rate (K)
NPV
Internal Rate of Return
Profitability Index
Cash flow PV
Initial Outlay
Profitability Index