FOR BUSINESS FINANCE, DO NOT USE EXCEL OR CASH FLOW FOR EQUIPMENT!

The Andy Company is examining purchasing a new piece of equipment.

The old system is currently one year old and had an original production life of seven years. It had cost $1,100,000 and was depreciated using 100% bonus. Andy 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. 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 (not taxes) 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 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.

Andy requires a 12% return on this project and has a 30% tax rate. Based on net present value, should you purchase the new system? THE IRR ON THIS WOULD BE??? :

SHOW ALL WORK!!! DO NOT USE EXCEL/ EXCEL FORMULAS!! Use scientific Calculator.

Discount % / (100% - Discount %) * 365 / (Due date - Discount date)

**USE 365 DAYS A YEAR!

EXAMPLE: need $5,000 of inventory, pay back in 120 days instead of usual 30 days, supplier charges you $250 of interest for delayed payment;

internal cost: -5,000 PV , 120/365 = N , 5,250 FV , Solve for I ; I = 15.998%