TABLE 1 MACRS Half-Year Convention Depreciation Rate for Recovery Period Year 3-year 5-year 7-year 10-year 15-year 20-year 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 123456 33.33 20.00 14.29 10.00 5.00 3.750 2 44.45 32.00 24.49 18.00 9.50 7.219 3 14.81 19.20 17.49 14.40 8.55 6.677 7.41 11.52 12.49 11.52 7.70 6.177 11.52 8.93 9.22 6.93 5.713 5.76 8.92 7.37 6.23 5.285 8.93 6.55 5.90 4.888 4.46 6.55 5.90 4.522 6.56 5.91 4.462 6.55 5.90 4.461 3.28 5.91 4.462 5.90 4.461 5.91 4.462 5.90 4.461 5.91 4.462 2.95 4.461 4.462 4.461 4.462 4.461 2.231 2. You are evaluating two mutually exclusive projects. The cash flows for each are: Project A Project B Year O ($50,000) ($75,000) Year 1 $20,000 $22,000 Year 2 $35,000 $25,000 Year 3 $20,000 $30,000 Year 4 $25,000 Year 5 $15,000 Year 6 $10,000 Assume that, if needed, each project is repeatable with no change in cash flows. Your cost of capital is 13%. a. Using the replacement chain approach, which project would you chose to invest in? b. Using the equivalent annual annuity approach, which project would you chose to invest in? 3. You are evaluating a project for your company that has an open ended life. Cash flow in year one is expected to be $25,000, and this cash flow is expected to grow at a rate of 5% per year for 3 years. After this 3 year period, your expectations are that the cash flows for the project will remain constant. The initial investment for the project is expected to be $110,000. Your cost of capital is 12%. Using this information, calculate the NPV for the project. Is it acceptable? 4. A project will use equipment that will cost $400,000, with an additional $75,000 for delivery and installation. Current assets will need to increase by $65,000, while current liabilities will not change. An extension to a building to house the equipment is also necessary, with a cost of $500,000. A computer system that is not related to the project will be sold for a salvage value of $75,000, book value $20,000. Your tax rate is 40%. What is the NINV for the project? 5. A project has equipment requirements that will cost $150,000 installed. NWC of $50,000 will also be required. The project is replacing old equipment that can be sold for $25,000, book value 0. If accepted, each year the project will generate new revenues of $250,000, and new expenses of $125,000. The equipment will be depreciated as a 3 year asset under MACRS. The useful life is 5 years. The new equipment has an estimated salvage value of $20,000. The company's tax rate is 40%. a. What is the NINV for the project? b. Calculate the NPV, IRR, MIRR and PI for the project, if your required rate is 12%? c. Perform a best case/worst case scenario analysis for this project, assuming revenues may vary by +/- 10%. How significant do you believe this risk analysis is on the acceptability of the project?