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4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 A Given Machine cost Depreciation Annual cost savings Machine life Salvage value (before tax) Tax rate Discount rate Analysis of Cash Flows Additional revenues (cost savings) Less: Depreciation expense Additional EBIT Less: Taxes NOPAT Plus Depreciation Less. Capex Less: Change in NWC Project Free Cash Flow Assessment of Project Value NPV IRR Payback 760,000 Straight line 250,000 0 5 30% 9% D Solution 1 250,000 152.000 years Year 2 250,000 152.000 3 250,000 152.000 te pe o sorve for part c. simply substitute $200,000 for the an G H 250,000 152.000 6 250,000 152.000 Solution Legenc Value given in problem Formula/Calculation/Analys Qualitative analysis or She Goal Seek or Solver cell Crystal Ball Input Crystal Ball Output 2-12 Project Valuation Carson Electronics is currently considering whether to acquire a new materials-handling machine for its manufacturing operations. The machine costs $760,000 and will be depreciated using straight-line depreciation toward a zero salvage value over the next five years. During the life of the machine, no new capital expenditures or investments in working capital will be required. The new materials-handling machine is expected to save Carson Electronics $250,000 per year before taxes of 30%. Carson's CFO recently analyzed the firm's opportunity cost of capital and estimated it to be 9%. a. What are the annual free cash flows for the project? b. What are the project's NPV and IRR? Should Carson Electronics accept the project? c. Carson's new head of manufacturing was concerned about whether the new handler could deliver the promised savings. In fact, he projected that the savings might be 20% lower than projected. What are the NPV and IRR for the project under this scenario