Sentry Company

Please complete this problem in Excel using NPV and IRR functions.

Sentry Company is contemplating the purchase of a new high-speed grinder to replace the existing grinder. The existing grinder was purchased 2 years ago at an installed cost of $60,000; it is being depreciated under MACRS using a 5-year recovery period. The existing grinder is expected to have a usable life of 5 more years

(hint: start depreciation expense in year 3 since the existing grinder was purchased two years ago.)

The new grinder costs $105,000 and requires $5,000 of installation costs; it has a 5-year usable life and would be depreciated under MACRS using a 5-year recovery period.

The existing grinder can currently be sold for $70,000 without incurring any removal or cleanup costs. To support the increased business resulting from the purchase of the new grinder, the following would increase by respective amounts: accounts receivable by $40,000, inventories by $30,000, and accounts payable by $58,000. At the end of 5 years, the existing grinder is expected to have a market value of zero; the new grinder would be sold to net $29,000 after removal and cleanup costs and before taxes. The firm pays 40 percent taxes on both ordinary income and capital gains.

The estimated profits before depreciation and taxes over the 5 year for both the new and existing grinder are shown in the following table:

EBITDA

Year New Grinder Existing Grinder

1 $43,000 $26,000

2 43,000 24,000

3 43,000 22,000

4 43,000 20,000

5 43,000 18,000

a.) Calculate the initial investment associated with the replacement of the existing grinder by the new one.

b.) Determine the incremental operating cash inflows associated with the proposed grinder replacement.

c.) Determine the terminal cash flow expected at the end of year 5 from the proposed grinder replacement.

d.) Depict on a time line the relevant cash flows associated with the proposed grinder replacement decision.

e.) Calculate Payback, IRR, NPV assuming cost of capital of 12% and MIRR assuming a reinvestment rate of 12%.

f.) Explain the difference between Modified Internal Rate of Return (MIRR) and IRR.

g) State and explain your recommendation on proposed capital expenditure.