Fake Company Tau (FCT) managers have decided to finally proceed with an upgrade of equipment in its manufacturing plant that will convert about 40% of its various production activities to automated equipment from manual labor. The savings is expected to be significant, since automated production will improve efficiency and reduce flaws. Earnings before interest and taxes (EBIT) for the project is listed below. The investment in new equipment will be depreciated straight line over the five years of the project evaluation period (and all of the $3.8 million initial investment is depreciable). For capital budgeting evaluation purposes, FCT will consider the cash flow that would be available if it sold off the equipment at the end of Year 5. Engineers believe the sales price could be about $2.2 million. Fortunately, this project is generally independent of other company activities. The relevant tax rate is 26.0%, and the company's WACC is 12.8%. What is the net present value (NPV) and IRR of this project? EBIT: Year 1 $425,000 Year 2 = $450,000 • Year 3 = $480,000 • Year 4 = $495,000 • Year 5 = $515,000 about $1,313,838 and 23.8% about $1,000,617 and 21.6% about $1,430,303 and 25.3%

Fake Company Tau (FCT) managers have decided to finally proceed with an upgrade of equipment in its manufacturing plant that will convert about 40% of its various production activities to automated equipment from manual labor. The savings is expected to be significant, since automated production will improve efficiency and reduce flaws. Earnings before interest and taxes (EBIT) for the project is listed below. The investment in new equipment will be depreciated straight line over the five years of the project evaluation period (and all of the $3.8 million initial investment is depreciable). For capital budgeting evaluation purposes, FCT will consider the cash flow that would be available if it sold off the equipment at the end of Year 5. Engineers believe the sales price could be about $2.2 million. Fortunately, this project is generally independent of other company activities. The relevant tax rate is 26.0%, and the company's WACC is 12.8%. What is the net present value (NPV) and IRR of this project? EBIT: Year 1 $425,000 Year 2 = $450,000 • Year 3 = $480,000 • Year 4 = $495,000 • Year 5 = $515,000 about $1,313,838 and 23.8% about $1,000,617 and 21.6% about $1,430,303 and 25.3%

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter19: Capital Investment

Section: Chapter Questions

Problem 15E: Gina Ripley, president of Dearing Company, is considering the purchase of a computer-aided...

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