Great Northern, Inc. Capital Investment Analysis Great Northern, Inc. is an Idaho-based company that manufactures equipment for the mining industry. The company is considering an investment in a project to manufacture accessories for their existing products. The project involves buying a machine to manufacture the accessories in-house. The machine costs $950,000, with shipping and installation charges on the machine of $37,000. Special building modifications costing $26,000 are required in order to install the machine and are considered part of the machine. These outlays occur as soon as they decide to take the investment. Special training for employees will cost $32,000 the first year, with payment due near the end of the first year. The decision to move ahead with the project results from a pilot study conducted by outside consultants. Their report, at a cost of $77,000, suggests the accessory business would provide attractive growth opportunities. The economic life of the product line is 6 years. They expect to be able to sell the machine at the end of six years for $85,000. The machine’s engineering life is 11 years, and it falls into the 7-year depreciation class for tax purposes. Depreciation will be simplified straight-line (to a value of zero). For financial reporting purposes, the accounting group indicated the equipment would be depreciated straight-line over ten years. If the firm accepts the project, the incremental added sales are estimated at 920 units at a price of $475.00 per unit for the first year. They expect unit sales to grow at a rate of 8 percent per year for six years (remember – there is no such thing as a partial unit. You can use the ROUND function to address this). Prices are expected to grow at a rate of 3 percent per year. First-year incremental cash operating expenses are estimated at $220,000. Due to increased attention to expense control at Great Northern, the firm expects incremental expenses for the project to grow at only 2.3 percent per year. The firm expects to have a 20% marginal tax rate apply for the life of the project along with an average tax rate of 15%. The additional business generated will cause inventory to increase by $40,000 and accounts receivable by $120,000. Accounts payable will also increase by $50,000. These changes will occur immediately, as soon as they take the project. The company believes that the appropriate discount rate to use for the project is 13%.

Questions Calculate the Net Present Value, IRR, MIRR, Payback, and Discounted Payback for the project. Should the company proceed with the new machine?