Question
X Company is considering a new processor that costs $150,000. Shipping and setup costs for the new processor are estimated to be $15,000. Xs working
X Company is considering a new processor that costs $150,000. Shipping and setup costs for the new processor are estimated to be $15,000. Xs working capital requirement is expected to increase by $17,000 when the new processor begins operation and is expected to be fully recoverable at the end of the project. The new processors useful life is expected to be 5 years and its salvage value at that point is estimated to be $60,000. The new processor is being depreciated using a 5-year ACRS life. Assume a tax rate of 35% and a cost of capital of 12%.
Estimated incremental revenues and incremental cash operating expenses for the new processor before tax for each year are shown in the table below.
Q1. What is the cost of the initial outlay?
Q2. Given the initial outlay for the new processor, assume the following yearly incremental after-tax cash flows (below) . Assume a cost of capital of 12%. What is the NPV of the Project?
Year 1 | $40,000 |
Year 2 | $40,000 |
Year 3 | $50,000 |
Year 4 | $55,000 |
Year 5 | $100,000 |
Q3. Given the initial outlay for the new processor, assume the following yearly incremental cash flows (below). Assume a cost of capital of 12%. What is the IRR of the Project?
Year 1 | $45,000 |
Year 2 | $45,000 |
Year 3 | $50,000 |
Year 4 | $50,000 |
Year 5 | $105,000 |
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started