Please include solutions/explanations to ALL parts of question. Thanks in advanc
ID: 2783011 • Letter: P
Question
Please include solutions/explanations to ALL parts of question. Thanks in advance!
1. (5 points) You are the CEO of Fidget Spinners Inc. You are considering purchasing a new 3-D printer to produce all of your product. The 3-D printer will cost $480,000. The printer will be depreciated straight-line to $0 over 5 years After 5 years the Printer is sold for $30,000. Due to purchasing the 3-D printer, you will be able to save $145,000 before taxes per year in production costs. The tax rate is 35 percent. Assume a 10% annual required rate of return. a. What is the NPV of the project? b. What is the IRR for the project? c. Do we Accept the project? Why or why not?Explanation / Answer
Answer a Calculation of NAV of the project Year 0 1 2 3 4 5 NPV Cost of 3D-Printer -$480,000 Incremental Operating Cash flow $125,750 $125,750 $125,750 $125,750 $125,750 Salvage value of 3D-Printer $30,000 Tax on salvage value @ 35% -$10,500 Net Cash flow -$480,000 $125,750 $125,750 $125,750 $125,750 $145,250 Discount Factor @ 10% 1.00000 0.90909 0.82645 0.75131 0.68301 0.62092 Present Values -$480,000 $114,318 $103,926 $94,478 $85,889 $90,189 $8,799 Answer b Calculation of IRR of the project At IRR, the NPV of the project is equal to zero. Year Net Cash flow Discount Factor @ 10.7014% Present Values 0 -$480,000 1 -$480,000 1 125750 0.903330943 $113,594 2 125750 0.816006792 $102,613 3 125750 0.737124184 $92,693 4 125750 0.665867084 $83,733 5 145250 0.601498341 $87,368 NPV $1 IRR = 10.70% Answer c You should accept the project as it has positive NPV and IRR is greater than it's required rate of return. Working Calculation of Incremental operating cash flows from the 3D-Printer Year 1 2 3 4 5 Saving in Production cost before tax $145,000 $145,000 $145,000 $145,000 $145,000 Less : Depreciation $90,000 $90,000 $90,000 $90,000 $90,000 Saving in Production cost after tax $55,000 $55,000 $55,000 $55,000 $55,000 Less : Tax @ 35% $19,250 $19,250 $19,250 $19,250 $19,250 Profit after Tax $35,750 $35,750 $35,750 $35,750 $35,750 Add : Depreciation $90,000 $90,000 $90,000 $90,000 $90,000 Incremental Operating Cash flow $125,750 $125,750 $125,750 $125,750 $125,750 Depreciation on 3D-Printer using straight line method = (Cost - Salvage value) / Useful life in years = ($480000 - $30000)/5 years = $90,000