Texas Roks, Inc. is considering a new quarry machine. The costs and revenues associated with the machine have been provided to you for analysis:
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Cost of the new project
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$4,000,000
|
|
Installation costs
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$100,000
|
|
Estimated unit sales in year 1
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50,000
|
|
Estimated unit sales in year 2
|
75,000
|
|
Estimated unit sales in year 3
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40,000
|
|
Estimated sales price in year 1
|
$150
|
|
Estimated sales price in year 2
|
$175
|
|
Estimated sales price in year 3
|
$160
|
|
Variable cost per unit
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$120
|
|
Annual fixed cost
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$50,000
|
|
Additional working capital needed
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$435,000
|
|
Depreciation method
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3 years straight-line method, no salvage value
|
|
Texas Rok's tax rate
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40%
|
|
Texas Rok's cost of capital
|
13%
|
Required:
- Calculate operating cash flow and the change in net working capital.
- Determine the NPV and IRR of the project.
- Should the company accept or reject the project based on the NPV? Why?
- Should the company accept or reject the project based on the IRR? Why?
- What is your final accept or reject decision? Why?
- What is the payback period for this project? Would this influence your decision to accept or reject?