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Homework answers / question archive / Your firm is thinking about replacing equipment in its production facilities
Your firm is thinking about replacing equipment in its production facilities. When considering the replacement, you obtain the following information:
The expansion will require the company to purchase today (t = 0) $5,000,000 of new equipment. An additional $200,000 in installation charges will be required. The equipment will be depreciated as MACRS 3-year over the following four years at the following rates:
| t = 1 | 33% |
| t = 2 | 45% |
| t = 3 | 15% |
| t = 4 | 7% |
The expansion will require the company to increase its net operating working capital by $150,000 today (t = 0). This net operating working capital will be recovered at the end of the projects 5 year economic life.
The old equipment is fully depreciated (book value = $0) and it can be sold for $85,000.
The new equipment is expected to have a salvage value of $30,000 at the end of its 5 year economic life.
Your firms operating costs, excluding depreciation, are expected to reflect a decrease of $75,000 per year for each year the new equipment is in operation.
The new equipment will increase the firms sales. The projected increases are as follows:
| Year 1 | $3,000,000 |
| Year 2 | $3,500,000 |
| Year 3 | $2,500,000 |
| Year 4 | $1,500,000 |
| Year 5 | $1,000,000 |
The required return for the project is 10%. The firms tax rate is 40%.
a. Forecast the NINV, NCFs and Terminal Value.
b. What are the proposed projects Net Present Value (NPV) and Internal Rate of Return?
c. If there are no other project proposals in the firm and you have the money available to fund this project, will you fund the project proposal or not? why?
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