Question
Roten Manufacturing Company is considering an investment on a machine for producing auto parts. The machine costs $250,000 today, will have a five-year life and
Roten Manufacturing Company is considering an investment on a machine for producing auto parts. The machine costs $250,000 today, will have a five-year life and will be depreciated over a five-year life on a straight-line basis toward a zero salvage value. The company paid a consulting company $7,000 last year to help them decide whether there is a sufficient demand for the auto parts. In addition to the investment on the machine, the company also invests $15,000 in net working capital. The company has estimated the performance of the new machine and believes the following are good estimates of the new asset: sales $140,000 per year, cost of goods sold (35% of sales) per year, and administrative expenses $15,000 per year. The company pays interest $20,000 annually on average, has a 10% cost of capital and a 30% tax rate. Answer Questions 1 - 8. A. Should Roten include consulting fee, $7,000, in estimating project's cash flows? a. No b. Yes B. What is the project cash flow at Year 0? a. -$15,000 b. -$203,000 c. -$265,000 d. -$250,000 C. What is the project cash flow at Year 5? a. $74,000 b. $68,200 c. $83,200 d. $50,500 D. What is payback period for the project? a. 3.78 years b. 4.02 years c. 4.51 years d. 3.89 ears E. What is NPV for the project? a. -$6,468.34 b. $2,845.48 c. $1,653.45 d. -$31,469.12 F. What is IRR for the project? a. 8.52% b. 9.04% c. 10.41% d. 11.73% G. What is PI for the project? a. 0.98 b. 0.94 c. 1.89 d. 1.01 H. Should Roten accept the project? a. No b. Yes (SHOW WORK ON ALL PARTS)
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