Devry Busn 379

In: Business and Management

Submitted By ElectricSoup3008
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Course Project Part II

Introduction
You will assume that you still work as a financial analyst for AirJet Best Parts, Inc. The company is considering a capital investment in a new machine and you are in charge of making a recommendation on the purchase based on (1) a given rate of return of 15% (Task 4) and (2) the firm’s cost of capital (Task 5).
Task 4. Capital Budgeting for a New Machine
A few months have now passed and AirJet Best Parts, Inc. is considering the purchase on a new machine that will increase the production of a special component significantly. The anticipated cash flows for the project are as follows:
Year 1 $1,100,000
Year 2 $1,450,000
Year 3 $1,300,000
Year 4 $950,000
You have now been tasked with providing a recommendation for the project based on the results of a Net Present Value Analysis. Assuming that the required rate of return is 15% and the initial cost of the machine is $3,000,000.
1. What is the project’s IRR? (10 pts)
22.38%
2. What is the project’s NPV? (15 pts) NPV = (1,100,000/1.15) + (1,450,000/1.15)^2 + (1,300,000/1.15)^3 +(950,000/1.15) ^ 4 – 3,000,000 = $450,866.74
3. Should the company accept this project and why (or why not)? (5 pts)
In looking at the overall analysis of the project, I believe it would be beneficial to accept the project because, the projects (IRR) Internal Rate Return are greater than the (RRR) Required Rate of Return and the overall (NPV) Net Present Value is positive meaning the value is greater than zero.

4. Explain how depreciation will affect the present value of the project. (10 pts)
Depreciation is not considered a cash flow, but it does generally reduce a company’s tax liability. So when looking at the depreciation of this project, depreciation would cause an increase in the projects (PV) Present Value, due to the fact that, it would save on the amount of taxes and…...

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