Spacevoyage Inc. is considering the installation of a new experimental laboratory which requires a key equipment costing $5,000,000. It is expected that the equipment will generate important experimental material worth $2,000,000 for each of the next 5 years. In the 6th year, the equipment will need an upgrade costing $2,500,000. Required return for this project is 15%. a) Which capital budgeting method between NPV and IRR will be most suitable for arriving at a decision on whether or not to get the equipment installed? Briefly explain your reasons. b) Should the new equipment be installed? Support your answer with relevant computation.

Spacevoyage Inc. is considering the installation of a new experimental laboratory which requires a key equipment costing $5,000,000. It is expected that the equipment will generate important experimental material worth $2,000,000 for each of the next 5 years. In the 6th year, the equipment will need an upgrade costing $2,500,000. Required return for this project is 15%. a) Which capital budgeting method between NPV and IRR will be most suitable for arriving at a decision on whether or not to get the equipment installed? Briefly explain your reasons. b) Should the new equipment be installed? Support your answer with relevant computation.

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

Section: Chapter Questions

Problem 1PS

See similar textbooks

Similar questions

Atlantic Manufacturing is considering a new investment project that will last for four years. The delivered and installed cost of the machine needed for the project is $23,957 and it will be depreciated according to the three-year MACRS schedule. The project also requires an initial increase in net working capital of $300. Financial projections for sales and costs are in the table below. In addition, since sales are expected to fluctuate, NWC requirements will also fluctuate. The end-of- year NWC requirements are included below (hint: these NWC capital requirements DO NOT represent the change in NWC for the period). The $0 requirement for NWC at the end of year 4 means that all NWC is recovered by the end of the project. The corporate tax rate is 35% and the required return on the project is 12%. Year 1 2 3 4 Sales $11,653 $12,746 $13,973 $10,638 Costs 2,322 2,536 3,456 1,434 NWC 324 352 231 0 Requirements What is the project's NPV? (Round answer to O decimal places. Do not round…
Management of Blossom Home Furnishings is considering acquiring a new machine that can create customized window treatments. The equipment will cost $225,550 and will generate cash flows of $97,750 over each of the next six years. If the cost of capital is 12 percent, what is the MIRR on this project?
Bidump Corporation is evaluating two mutually exclusive capital budgeting projects. Project W2, which costs $210,000, is expected to generate $51,400 for six years and Project 5, which costs $104,000, it expected to $45,200 for six years. Bidump's required rate of return is 11 percent. What is the internal rate of return (IRR) of the project the company should purchase) Do not round intermediate calculations. Round your answer to two de places. -Select- should be purchased. Its IRR is N
Goergen Corporation is considering a capital budgeting project that would require an initial investment of $700,000. The investment would generate annual cash inflows of $267,000 for the life of the project, which is 4 years. The company's discount rate is 10%. The net present value of the project is closest to: Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using the tables provided. Multiple Choice $368,000 $700,000 $846,123 $146,123
Stockinger Corporation has provided the following information concerning a capital budgeting project: Investment required in equipment $ 296,000 Expected life of the project 4 Salvage value of equipment $ 0 Annual sales $ 620,000 Annual cash operating expenses $ 444,000 Working capital requirement $ 30,000 One-time renovation expense in year 3 $ 88,000 The company’s income tax rate is 30% and its after-tax discount rate is 11%. The working capital would be required immediately and would be released for use elsewhere at the end of the project. The company uses straight-line depreciation on all equipment. Assume cash flows occur at the end of the year except for the initial investments. The company takes income taxes into account in its capital budgeting. The total cash flow net of income taxes in year 3 is:
Winview Clinic is evaluating a project that costs $52,125 and has expected net cash inflows of $12,000 per year for eight years. The first inflow occurs one year after the cost outflows, and the project has a cost of capital of 12%. b. What is the project's NPV? Its IRR? Its MIRR?
Terra Landscape is evaluating a capital budgeting project that is expected to generate $80, 100 per year during its eight-year life. If its required rate of return is 14 percent, what is the value of the project to Terra Landscape?
Axis Corp. is studying two mutually exclusive projects. Project Kelvin involves an overhaul of the existing system; it will cost $40,000 and generate cash inflows of $20,000 per year for the next 3 years. Project Thompson replaces the existing system; it will cost $285,000 and generate cash inflows of $65,000 per year for 6 years. Using a(n) 9.07% cost of capital, calculate each project's NPV, and make a recommendation based on your findings. The NPV of project Kevin is ____ The NPV of project Thompson is _____ Which project should the company choose?
Kwon Jewelers is evaluating a 1-year project that would involve an initial investment in equipment of $32,000 and an expected cash flow of $36,000 in 1 year. The project has a cost of capital of 8.36 percent and an internal rate of return of 12.50 percent. If Kwon Jewelers were to use $32,000 in cash from its bank account to purchase the equipment, the net present value of the project would be $1,222.59. However, Kwon Jewelers has no cash in its bank account, so using money from its account is not possible. Therefore, the firm would need to borrow money to raise the $32,000. If Kwon Jewelers were to borrow money to raise the $32,000, the interest rate on the loan would be 13.47 percent. Kwon Jewelers would receive $32,000 at the start of the project and would pay $36,310 one year later. What is the NPV of the project if Kwon Jewelers borrows $32,000 to pay for the project? $1,222.59 (plus or minus 3 dollars) $0.00 (plus or minus 3 dollars) $-273.55 (plus or minus 3 dollars) $1,509.04…
Coyne Corporation is evaluating a capital investment opportunity. This project would require an initial investment of $35,000 to purchase equipment. The equipment will have a residual value at the end of its life of $4,000. The useful life of the equipment is 4 years. The new project is expected to generate additional net cash inflows of $23,000 per year for each of the four years. Coyne's required rate of return is 10%. The net present value of this project is closest to:
Management of Sunland Home Furnishings is considering acquiring a new machine that can create customized window treatments. The equipment will cost $266,550 and will generate cash flows of $81,750 over each of the next six years. If the cost of capital is 15 percent, what is the MIRR on this project? - MMR = ? %
The X Company is considering the acquisition of a new processor that has an estimated installed cost of $57,000. The processor has an expected life of 5 years and will be depreciated over a 5 year ACRS life to a zero salvage value. However, it is expected that the processor can be sold at that time for $6,000. If purchased, the entire $57,000 would be borrowed at an interest rate of 9%. A capital budgeting analysis results in a positive NPV for the project. An alternative to purchase is to lease the asset for an annual lease payment of $13,500. The lease includes maintenance services estimated to cost Company C $3,000 per year if they were not included in the lease payment. Company C's cost of capital is 11% and its marginal tax rate is 34%. Evaluate the purchase and lease options and make a recommendation of which is preferred.

SEE MORE QUESTIONS

Recommended textbooks for you

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

SEE MORE TEXTBOOKS