Question
Tyler Inc. is considering switching to a new production technology. The cost of the required equipment will be $4 million. The discount rate of 12
| Tyler Inc. is considering switching to a new production technology. The cost of the required equipment will be $4 million. The discount rate of 12 percent. The cash flows that the firm expects the new technology to generate are as follows. | |||||||||
| Cost: | |||||||||
| Project Life (years): | |||||||||
| Discount Rate: | |||||||||
| Project | |||||||||
| Year | Cash Flows | ||||||||
| 0 | $0 | ||||||||
| 1 | $0 | ||||||||
| 2 | $0 | ||||||||
| 3 | $845,000 | ||||||||
| 4 | $845,000 | ||||||||
| 5 | $845,000 | ||||||||
| 6 | $1,450,000 | ||||||||
| 7 | $1,450,000 | ||||||||
| 8 | $1,450,000 | ||||||||
| 9 | $1,450,000 | ||||||||
| a. Compute the payback and discounted payback periods for the project. | |||||||||
| Hint: Calculate the cumulative cash flow for each year of the project's life. Write an equation using "IF" statements to compute the project's payback period. Calculate the cumulative present value cash flow for each year of the project's life. Write an equation using "IF" statements to compute the project's discounted payback period. | |||||||||
| Cumulative | |||||||||
| Project | Cumulative | Cumulative | PVCF @ | Cumulative | Periods | ||||
| Year | Cash Flows | Cash Flow | Periods | 0.00% | PVCF | (PVCF) | |||
| 0 | |||||||||
| 1 | |||||||||
| 2 | |||||||||
| 3 | |||||||||
| 4 | |||||||||
| 5 | |||||||||
| 6 | |||||||||
| 7 | |||||||||
| 8 | |||||||||
| 9 | |||||||||
| Payback Period: | |||||||||
| Discounted Payback Period: | |||||||||
| b. What is the NPV for the project? Should the firm go ahead with the project? | |||||||||
| Hint: Calculate the net present value using an equation and then use the NPV function, NPV(rate,value1,value2, ...), to compute the net present value of the project. | |||||||||
| NPV (Equation): | |||||||||
| NPV (Excel Function): | |||||||||
| Explanation: | |||||||||
| c. What is the IRR, and what would be the decision based on the IRR? | |||||||||
| Hint: Use the IRR function, IRR(values,guess), to compute the internal rate of return of the project. | |||||||||
| IRR: | |||||||||
| Explanation: | |||||||||
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