You have been employed by Evolution Tech Co. as a financial manager to evaluate a new project.
Question:
You have been employed by Evolution Tech Co. as a financial manager to evaluate a new project. The company is investing $6 million in new machinery that will produce the next-generation routers. The project will last six years. Sales to its customers are expected to be $1.75 million per year, while the annual expenses are $898620 (excluding depreciation). The machinery will be depreciated to zero by year six using the straight-line method. The company's tax rate is 30 per cent, and its cost ofcapital is 16 per cent. At this point, Evolution Tech Co. is not interested in any inflation adjustments.
Required:
1.1Calculate the Payback Period (PP) and the Average Accounting Return (ARR)
1.2Calculate the Net Present Value (NPV) and Internal Rate of Return (IRR) of the project.
1.3Outline the advantages and disadvantages of using NPV and IRR as capital budgeting methods and critically explain under what circumstances they might provide conflicting results in project appraisal decisions.