Quasar Tech Co. management is investing $6 million in new machinery that will pr
ID: 2762535 • Letter: Q
Question
Quasar Tech Co. management is investing $6 million in new machinery that will produce next-generation routers. Sales to its customers will amount to $1.750.000 for the next three years and then increase to $2.4 million for three more years. The project is expected to last six years and operating costs, excluding depreciation, will be $898,620 annually. The machinery will be depreciated to salvage value of SO over 6 years using the straight-line method. The company's tax rate is 30%. and the cost of capital is 16%. What is the payback period? What is the average accounting return? Calculate the project NPV. what is the irr or this project?Explanation / Answer
Answer:a
PB = Years before cost recovery + (Remaining cost to recover/ Cash flow during the year)
= 5 + ($610,170 / $1,350,966) = 5.45 years
Answer:b Average after-tax income = $123,466
Average book value of equipment = $3,000,000
Average Accounting return=(123466/3000000)*100=4.12%
Answer:c
Cost of this project = $6,000,000
Required rate of return = 16%
Length of project = n = 6 years
Answer:d
Working Note:
Year Cash Flow ($) Cumulative Cash Flows ($) 0 -6000000 -6000000 1 895966 -5104034 2 895966 -4208068 3 895966 -3312102 4 1350966 -1961136 5 1350966 -610170 6 1350966 740796