NPV Calculations

Fact Situation: You are the CFO of ABC Manufacturing Company. Your Company is considering the purchase of a machine which will automate its production process. You have been asked by the President to justify the purchase of the machine, and you have worked with the sales and manufacturing departments to develop projections relating to the purchase of the machine.

Here are the projections that your team has developed:

• The initial cost of the machine is $500,000
• The company uses straight line depreciation for a period of 5 years for machine of this type
• The company expects incremental operating income to be $125,000 per year and a tax rate of 25%
• The companys weighted average cost of capital is 10.5%
• The company has traditionally used the simple payback method to evaluate project acceptance

After completing the NPV worksheet, you wish to use other measures of performance, including NPV, simple payback, discounted payback, internal; rate of return and the discounted benefit/cost ratio. You believe that an increase in the number of performance measures is valid and you wish to explain why other measures should be used to evaluate project performance.

Required: Complete the NPV worksheet and make a recommendation about whether or not the project should be approved. Include an explanation of the pros and cons of each performance measure, and explain why some measures are better than others in evaluating project performance.

E F G I J K L M 1 N 4 5 6 7 8 9 10 Total 0.00 0.00 0.00 0.00 0.00% 0.00 0.00 0.00 0.00 0.00 0.00% 0.00 0.00 0.00 0.00 0.00 0.00% 0.00 0.00 0.00 0.00 0.00 0.00% 0.00 0.00 0.00 0.00 0.00 0.00% 0.00 0.00 0.00 0.00 0.00 0.00% 0.00 0.00 0.00 0.00 0.00 0.00% 0.00 0.00 0.00 0.00 0.00 0.00% 0.00 0.00 0.00 0.00 0.00 0.00% 0.00 0.00 0.00 0.00 0.00 0.00% 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 A B 1 Capital Project Evaluation 2 3 ABC Manufacturing Company 4 5 Year 0 6 7 Description 8 9 Cost of Machine 0.00 10 Incremental Operating Income/Exper 0.00 11 Straight Line Depreciation 0.00 12 Total Cash Flow Before Tax 0.00 13 Tax Rate 0.00% 14 Taxes 0.00 15 16 Total Incremental Cash Flow 0.00 17 18 Weighted Average Cost of Capital 10.50% 19 20 Discounted Cash Flow 0.00 21 22 Net Present Value 0.00 23 24 25 Check: NPV Excel 0.00 26 27 Simple Payback Years #DIV/O! ! 28 29 Discounted Payback Years #DIVIO 30 31 Internal Rate of Return #NUM! 32 33 Discounted Benefit/Cost Ratio #DIV/O! 34 35 Present Value Weighted Average Cost 36 of Capital 37 38 1.0000 39 0.9050 40 0.8190 41 0.7412 42 0.6707 43 0.6070 44 0.5493 45 0.4971 46 0.4499 47 0.4071 48 10 0.3684 49 ONMOO 9