Modern Machine, Inc., is considering a new 5-year project that requires an initial fixed asset investment of 654 million. The fixed asset will be depreciated using MACRS for its 5-year life, after which it can be sold for 300 million. The project is estimated to generate 990 million in annual sales, with costs of 90 million, each year. The tax rate is 34 percent, and the WACC is 10 percent. The project requires an initial investment in net working capital at initiation of the project of $15 million, with additional increases of $5 million at years 2 &3 (this total investment of NWC returns to the firm at the completion of the project, year 5). In addition to the purchase of the machine and change in net working capital, management has determined that the new machine will require an opportunity cost of $150 million at initiation (this will also be a cash inflow at the end of the project). | Year | 0 | 1 | 2 | 3 | 4 | 5 | | Cost of New Machine | | | | | | | | Accum. Depreciation | | | | | | | | Book Value of Machine | | | | | | | | Opportunity Cost | | | | | | | | Net Working Capital Balance | | | | | | | | Change in NWC | | | | | | | | Salvage Value of Machine | | | | | | | | Tax on Sale of Machine | | | | | | | | Cap. Ex. & NWC | | | | | | | | | | | | | | | | Add'l Sales Revenue | | | | | | | | Add'l Operating Costs | | | | | | | | Depreciation | | | | | | | | EBIT | | | | | | | | Tax (34%) | | | | | | | | Net Income | | | | | | | | | | | | | | | | Cash Flow from Operations (OCF) | | | | | | | | Cap. Ex. & NWC | | | | | | | | Total Incremental CF of Project | | | | | | | | | | | | | | | | | | | | | | | | What is the NPV and IRR of this project? | | | | | | | Discount Rate | | | | | | | | NPV | | | | | | | | IRR | | | | | | | Modern Machine has the alternative of investing in a 3-year machine that costs 540 million, requires the same opportunity cost, a 10 million increase in NWC at initiation and a 5 million investment at time 2. This machine will increase sales by 200 million and costs by 180 million, each year. | **The highlighted cells should have numbers, the rest formulas** | | | | | | Cash Flow of Cap. Budg. | Project B | | | | | Year | 0 | 1 | 2 | 3 | | Cost of New Machine | | | | | | Accum. Depreciation | | | | | | Book Value of Machine | | | | | | Opportunity Cost | | | | | | Net Working Capital Balance | | | | | | Change in NWC | | | | | | Salvage Value of Machine | | | | | | Tax on Sale of Machine | | | | | | Cap. Ex. & NWC | | | | | | | | | | | | Add'l Sales Revenue | | | | | | Add'l Operating Costs | | | | | | Depreciation | | | | | | EBIT | | | | | | Tax (34%) | | | | | | Net Income | | | | | | | | | | | | Cash Flow from Operations (OCF) | | | | | | Cap. Ex. & NWC | | | | | | Total Incremental CF of Project | | | | | | | | | | | | | | | | | | What is the NPV and IRR of this project? | What is the NPV and IRR of the 3-year machine? | | Discount Rate | | | | | | NPV | | | | | | IRR | | | | | | MACRS Table | | | | | | | | | | | | | | 3 Year Life | | 33.30% | 44.40% | 14.80% | 7.50% | | | | | | | | | 5 | | 20.00% | 32.00% | 19.20% | 11.50% | 11.50% | 5.80% | | | | | | | 7 | | 14.30% | 24.50% | 17.50% | 12.50% | 8.90% | 8.90% | 8.90% | 4.50% | | | | | 10 | | 10.00% | 18.00% | 14.40% | 11.50% | 9.20% | 7.40% | 6.60% | 6.60% | 6.60% | 6.60% | 3.10% | | |
Example Template 
Modern Machine, Inc., is considering a new 5-year project that requires an initial fixed asset investment of 976 million. Modern Machine has the alternative of The fixed asset will be depreciated using MACRS for its 5-year life, after which it can be sold for 500 million. The project investing in a 3-year machine that costs is estimated to generate 0 million in annual sales, with costs of 10 million, each year. The tax rate is 34 percent, and the 760 million, requires the same opportunity WACC is 10 percent. The project requires an initial investment in net working capital at initiation of the project of $15 cost, a 10 million increase in NWC at million, with additional increases of $5 million at years 2 &3 (this total investment of NWC returns to the firm at the initiation and a 5 million investment at completion of the project, year 5). In addition to the purchase of the machine and change in net working capital,time 2. This machine will generate sales of management has determined that the new machine will require an opportunity cost of $150 million at initiation (this 200 million and costs of 20 million, each will also be a cash inflow at the end of the project) year Cash Flow of Cap. Budg. Project A Project B ear Cost of New Machine Accum. Depreciation Book Value of Machine Opportunity Cost Net Working Capital Balance Change in NWC Salvage Value of Machine Tax on Sale of Machine Cap. Ex. & NWC $976.00 $760.00 $195.20 $507.52 $694.91$807.15 $919.39 $976.00 $780.80 $468.48 $281.09 $168.85 $56.61 $150.00 $253.08 $590.52 $703.00 $760.00 $506.92 169.48 $57.00 $150.00 $150.00 $150.00 $15.00 $15.00 $20.00 $25.00 $25.00 $15.00 $10.00 $10.00 $15.00 10.00$0.00$5.00$15.00 $0.00 $19.38 -$920.00 $0.00 5.00 $184.38 $0.00-$5.00-$5.00 $0.00, $25.00 $150.75 -$1,141.00 S0.00 $5.00 $5.00$0.00$524.25 0.00 0.00 0.00$0.00 Add'I Sales Revenue Add'I Operating Costs Depreciation EBIT Tax (34%) Net Income $10.00 $10.00 10.00 10.00 $10.00 195.20 -312.32 -187.39 $112.24$112.24 $205.20 $322.32 -$197.39 $122.24 $122.24 69.77 $109.59 $67.11 41. $41.56 135.43$212.73 130.28 80.68 $80.68 $200.00 $200.00 $200.00 20.00 20.00 -$20.00 253.08 -$337.44 $112.48 $73.08 $157.44 $67.52 24.85 $53.53$22.96 $48.23103.91 $44.56 Cash Flow from Operations (OCF) Cap. Ex. & NWO 59.77 9.59 57.11 $31.56 $31.56 $1,141.00 $0.00 $5.00 $5.00 $0.00 $524.25 Total Incremental CF of Project $1.141.00 559.779459 $52.11 531.56 5555,81 204.85 $233.53 $157.04 920.00 $0.00 $5.00 $184.38 920.00 $204.85 $228.53 $341.42 5920.00 20485 522853 34142 What is the NPV and IRR of the 3-year machine? Should Modern Machine chose this machine over the 5-year machine? What is the NPV and IRR of this project? Discount Rate NPV IRR 10.0% ($602.67) -8.19% 10% ($288.39) 7.50%
