Xtra Mechanical, Inc. is a manufacturer of machine parts with locations in the United States. It is considering entering into an eight year supply agreement with a customer where it will supply certain parts to the customer for their products.

The project will require Xtra to purchase a new machine at the begining of the project and the cost of the machine is $8,500,000. At the end of the project, the machine is expected to be sold in the used market for 20% of the original cost before paying taxes. The five year MACRS depreciation will be used for tax purposes. The depreciate rates are shown below.

There is an initial net working capital investment of $15,000 and no further investment in net working capital is required. We assume that all the money tied up in the net working capital account will be recovered by the end of the project.

Revenues from the contract per year are shown below. Cost of goods sold is expected to be 50% of revenues. In addition to cost of goods sold, the project will also require additional operating costs of 7.0% of revenues per year.

The company's average tax rate is 23% and the marginal rate is 25%. Given the risk level of this project Xtra requires a rate of return 1% above its weighted cost of capital. Its weighted cost of capital is 10%.

FIll in the Boxes With Excel Formulas

Information Available in the Question (Please calculate COGS, Annual Additional Operating Costs, and Depreciation. You will use these numbers)
	PERIOD	0	1	2	3	4	5	6	7	8
Revenues			$ 3,000,000	$ 4,000,000	$ 5,000,000	$ 5,500,000	$ 6,000,000	$ 5,500,000	$ 4,500,000	$ 3,500,000
COGS
Annual Additional Operating Costs
Depreciation
MACRS Depreciation Rates			20.0%	32.0%	19.0%	12.0%	12.0%	5.0%
Cash Flow Table
	PERIOD	0	1	2	3	4	5	6	7	8
OCF
Less: Net Capital Spending
Less: Change in Net Working Capital
Add: After-tax Salvage of Machine in year 8
Add: Recovery from Net Working Capital Account in year 8
Cash Flow From Assets (CFFA)
	Answer
NPV
IRR
Accept or Reject the Project?