Question
XYZ Steel Corporation is deciding whether to expand operations. The expansion would require purchasing a new machine for $500,000, with additional $30,000 shipping and installation
XYZ Steel Corporation is deciding whether to expand operations. The expansion would require purchasing a new machine for $500,000, with additional $30,000 shipping and installation fees. The machine will be depreciated using a 7-year recovery period (use the percentages given in table 7-3 in the textbook). This project is expected to last 6 years, and the machine is expected to be sold for $200,000 at the end of year 6. In each of the six years of the project (years 1-6) there will be additional revenues of $125,000, and additional expenses of $45,000. Assume 35% tax rate, and 12% cost of capital.
a) Calculate after-tax annual cash flows from the project for years 0-6.
b) Calculate the NPV and the IRR of the project, determine whether it should be accepted, and explain why.
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