Assignment
1. Warmack Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $370,000 is estimated to result in $140,000 in annual pretax cost savings. The press falls in the MACRS five-year class, and it will have a salvage value at the end of the project of $62,000. The press also requires an initial investment in spare parts inventory of $10,000, along with an additional $1,500 in inventory for each succeeding year of the project. The shop's tax rate is 34 percent and its discount rate is 10 percent. MACRS schedule
Calculate the NPV of this project.
2. You have been hired as a consultant for Pristine Urban-Tech Zither, Inc. (PUTZ), manufacturers of fine zithers. The market for zithers is growing quickly. The company bought some land three years ago for $1.5 million in anticipation of using it as a toxic waste dump site but has recently hired another company to handle all toxic materials. Based on a recent appraisal, the company believes it could sell the land for $1.6 million on an aftertax basis. In four years, the land could be sold for $1.7 million after taxes. The company also hired a marketing firm to analyze the zither market, at a cost of $135,000. An excerpt of the marketing report is as follows:
The zither industry will have a rapid expansion in the next four years. With the brand name recognition that PUTZ brings to bear, we feel that the company will be able to sell 4,800, 5,700, 6,300, and 5,200 units each year for the next four years, respectively. Again, capitalizing on the name recognition of PUTZ, we feel that a premium price of $750 can be charged for each zither. Because zithers appear to be a fad, we feel at the end of the four-year period, sales should be discontinued.
PUTZ believes that fixed costs for the project will be $475,000 per year, and variable costs are 10 percent of sales. The equipment necessary for production will cost $4.5 million and will be depreciated according to a three-year MACRS schedule. At the end of the project, the equipment can be scrapped for $450,000. Net working capital of $135,000 will be required immediately. PUTZ has a 40 percent tax rate, and the required return on the project is 14 percent. MACRS Schedule
What is the NPV of the project?
3. Aria Acoustics, Inc. (AAI), projects unit sales for a new seven-octave voice emulation implant as follows:
|
Year
|
Unit Sales
|
|
1
|
76,000
|
|
2
|
89,000
|
|
3
|
103,000
|
|
4
|
98,000
|
|
5
|
79,000
|
Production of the implants will require $1,550,000 in net working capital to start and additional net working capital investments each year equal to 15 percent of the projected sales increase for the following year. Total fixed costs are $1,450,000 per year, variable production costs are $240 per unit, and the units are priced at $355 each. The equipment needed to begin production has an installed cost of $20,500,000. Because the implants are intended for professional singers, this equipment is considered industrial machinery and thus qualifies as seven-year MACRS property. In five years, this equipment can be sold for about 20 percent of its acquisition cost. AAI is in the 30 percent marginal tax bracket and has a required return on all its projects of 18 percent. MACRS schedule.
What is the NPV of the project?
What is the IRR?