Texas Roks, Inc. is considering a new quarry machine. The costs and revenues associated with the machine have been provided to you for analysis:
|
Cost of the new project |
$4,000,000 |
|
Installation costs |
$100,000 |
|
Estimated unit sales in year 1 |
50,000 |
|
Estimated unit sales in year 2 |
75,000 |
|
Estimated unit sales in year 3 |
40,000 |
|
Estimated sales price in year 1 |
$150 |
|
Estimated sales price in year 2 |
$175 |
|
Estimated sales price in year 3 |
$160 |
|
Variable cost per unit |
$120 |
|
Annual fixed cost |
$50,000 |
|
Additional working capital needed |
$435,000 |
|
Depreciation method |
3 years straight-line method, no salvage value |
|
Texas Rok’s tax rate |
40% |
|
Texas Rok’s cost of capital |
13% |
Required:
- Calculate operating cash flow and the change in net working capital.
- Determine the NPV and IRR of the project.
- Should the company accept or reject the project based on the NPV? Why?
- Should the company accept or reject the project based on the IRR? Why?
- What is your final accept or reject decision? Why?
- What is the payback period for this project? Would this influence your decision to accept or reject?
Submit your findings to the above questions in a Microsoft Word or Excel document. Use an Excel document to illustrate your calculations.
