Drexel Manufacturing (DM) is a leading firm in the creation of environmentally safe containers. DM is considering purchasing new technologically advanced equipment that will not only increase production capabilities but also save the firm money on daily operating expenses. The new investment is estimated to cost $5,250,000. It has a five-year useful life. Given the greater speed of the new equipment, you believe units sold would rise by 500,000 and are estimated to sell at $10 each. It costs $5 per unit to produce. You forecast a savings on operating expenses of $500,000 per year. Start-up net working capital is estimated at $300,000. After five-years, you estimate new technology will be available and believe you can sell the current equipment for $425,000. The current tax rate is 25% and the required rate of return is 8.75%. Calculate the payback period, NPV and IRR

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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Calculate the payback period, NPV and IRR
Drexel Manufacturing (DM) is a leading firm in the creation of environmentally safe containers. DM is considering
purchasing new technologically advanced equipment that will not only increase production capabilities but also
save the firm money on daily operating expenses. The new investment is estimated to cost $5,250,000. It has a
five-year useful life. Given the greater speed of the new equipment, you believe units sold would rise by 500,000
and are estimated to sell at $10 each. It costs $5 per unit to produce. You forecast a savings on operating
expenses of $500,000 per year. Start-up net working capital is estimated at $300,000. After five-years, you
estimate new technology will be available and believe you can sell the current equipment for $425,000. The
current tax rate is 25% and the required rate of return is 8.75%.
2A
Calculate the payback period, NPV and IRR
Transcribed Image Text:Drexel Manufacturing (DM) is a leading firm in the creation of environmentally safe containers. DM is considering purchasing new technologically advanced equipment that will not only increase production capabilities but also save the firm money on daily operating expenses. The new investment is estimated to cost $5,250,000. It has a five-year useful life. Given the greater speed of the new equipment, you believe units sold would rise by 500,000 and are estimated to sell at $10 each. It costs $5 per unit to produce. You forecast a savings on operating expenses of $500,000 per year. Start-up net working capital is estimated at $300,000. After five-years, you estimate new technology will be available and believe you can sell the current equipment for $425,000. The current tax rate is 25% and the required rate of return is 8.75%. 2A Calculate the payback period, NPV and IRR
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