Zimlick, Inc, a US pasta-machine manufacturer, is considering a $2.1 million device from United Technologies Corporation to automate pasta-machine quality inspection. The device will be depreciated according to the straight-line method over three years. The useful life of the device is 5 years, with an estimated sale value at year 5 of $300,000. The project will allow less pasta machines to be scrapped because of low quality, generating pretax earnings of $900,000 per year, and will not change the risk level of the firm. Zimlick’s cost of capital is 18%. The tax rate is 30%. Q1. Show a forecast of the cash flows for the project Q2. What is the net present value of the project? Q3. What is the IRR of the project? Q4. Would you undertake the investment? Why or why not?
Zimlick, Inc, a US pasta-machine manufacturer, is considering a $2.1 million device from United Technologies Corporation to automate pasta-machine quality inspection. The device will be depreciated according to the straight-line method over three years. The useful life of the device is 5 years, with an estimated sale value at year 5 of $300,000. The project will allow less pasta machines to be scrapped because of low quality, generating pretax earnings of $900,000 per year, and will not change the risk level of the firm. Zimlick’s cost of capital is 18%. The tax rate is 30%. Q1. Show a forecast of the cash flows for the project Q2. What is the net present value of the project? Q3. What is the IRR of the project? Q4. Would you undertake the investment? Why or why not?
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