Assignment 2: Course Project: Part 3 Your probationary period at the Cosmo K Manufacturing Group continues. Your supervisor, Gerry, assigns you a project each week to test your competence in finance. The company is considering the addition of a new office
Fin-Acc-BossAssignment 2: Course Project: Part 3
Your probationary period at the Cosmo K Manufacturing Group continues. Your supervisor, Gerry, assigns you a project each week to test your competence in finance.
The company is considering the addition of a new office machine that will perform many of the tasks now performed manually. For this week's task, Gerry has given you the responsibility of evaluating the cash flows associated with the new machine. He has requested the report to be delivered within the week.
Evaluation of a New Office Machine
The Cosmo K Manufacturing Group currently has sales of $1,400,000 per year. It is considering the addition of a new office machine, which will not result in any new sales but will save the company $105,500 before taxes per year over its 5-year useful life. The machine will cost $300,000 plus another $12,000 for installation. The new asset will be depreciated using a a modified accelerated cost recovery system (MACRS) 5-year class life. It will be sold for $25,000 at the end of 5 years. Additional inventory of $11,000 will be required for parts and maintenance of the new machine. The company evaluates all projects at this risk level using an 11.99% required rate of return. The tax rate is expected to be 35% for the next decade.
Tasks:
Answer the following questions:
- What is the total investment in the new machine at time = 0 (T = 0)?
- What are the net cash flows in each of the 5 years of operation?
- What are the terminal cash flows from the sale of the asset at the end of 5 years?
- What is the NPV of the investment?
- What is the IRR of the investment?
- What is the payback period for the investment?
- What is the profitability index for the investment?
- According to the decision rules for the NPV and those for the IRR, is the project acceptable?
- Is there a conflict between the two decision methods? If so, what would you use to make a recommendation?
- What are the pros and cons of the NPV and the IRR? Explain your answers.
Submission Details:
- Show the data used and the calculations for each question in a Microsoft Excel sheet and the analysis in a Microsoft Word document.
- Name your Microsoft Excel sheet MBA6010_W3_A2_LastName_
FirstName.xls and your Microsoft Word document MBA6010_W3_A2_
LastName_FirstName.doc. - Submit your assignment to the W3 Assignment 2 Dropbox by Saturday, August 13, 2016.
Assignment 2 Grading Criteria | Maximum Points |
Identified the initial investment in the machine, the cash flows in each of the 5 years, and the terminal cash flows for the machine. | 40 |
Calculated the NPV and the IRR for the machine. | 30 |
Accepted or rejected the investment in the machine on the basis of the IRR and the NPV approached and explained the decision-making criteria. | 40 |
Calculated the payback period and the profitability index and accepted or rejected the investment on the basis of each measure, explaining the decisions. | 40 |
Explained the decision-making criteria for each of the decision-making methods and identified how conflicts between the measures would be resolved. | 10 |
Wrote in a clear, concise, and organized manner. Utilized appropriate type and number of scholarly sources for graduate-level work. Demonstrated ethical scholarship in accurate representation and attribution of sources. Displayed accurate spelling, grammar, and punctuation. | 40 |
Total: | 200 |
10 years ago
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