Acme Plastic Inc wants to purchase a molding machine for its new product line. The new machine costs $200,000 and has installation, shipping and handling costs of $20,000. It has a life time of 10 years, is depreciated using the straight-line method and salvage value is zero. Acme's tax rate is 40%.
If Acme purchases the new machine, it expects to operate it for 7 years, which will be the duration of the project. Acme's expected return on this investment is 25%. Acme engaged UMUC Consulting Firm to do a capital budgeting evaluation and determine if it's a good investment to sell the old machine and buy the new one. After charging Acme $50,000 to evaluate the project, the consultants determined the following:
Annual sales will be $220,000 and profitability will be 15%. Acme will need $30,000 of networking capital (fully recuperated at the end of the project). Acme will be able to sell the machine at the end of the project (year 7) for $90,000.
Calculate:
1) The book value of the new machine at the end of the project, the capital gain (or loss) from the sale and if there was any tax implication (if so, how much)
2) The initial investment, after determining the net cash needs to start the new project.
3) The NPV of the project and Acme's decision to go or not to go with the new project
4) The value of the seven annual cash from operations, by showing the seven high-level pro-forma income statements
5) The IRR (internal rate of return) of the project
6) The book value of the machine at the end of year 3
7) The payback period of this project
8) Acme wants to re-evaluate the project and consider risk factors. Acme requests that a new NPV is calculated by assuming that the expected return is raised to 40%. What is the new NPV and would this be a go or no-go project?
9) What different approaches would you suggest Acme could take in order to re-evaluate the project by considering other risk factors? Describe them (no need to run calculations)
10) If Acme has limited resources to invest, but has 3 projects to evaluate, what factors should Acme consider in order to pick only one of the 3 projects?