The ABC Corporation is going to invest in a new piece of equipment which will cost $275,000 and falls into 5-year MACRS property. It costs $20,000 for delivery and installation. The company spends $10,000 for the Research and Development related to this project at the initial year, and need to pay $20,000 the rent for the factory which the equipment will be installed every year. Because the company has another project to do in the same factory, it will rent the factory regardless of the installation of the new equipment. It is expected to increase revenues in the first year of operations by $130,000. Revenues are expected to grow 10% each year for the life of the project, which is 4 years. A new project will affect the firm’s existing projects. If the company installs the new equipment, the revenue of its existing projects decreases by $20,000 every year. Operating costs (excluding depreciation) are expected to $50,000 at year 1 and are expected to grow 15% each year for the life of the project. Initial net working capital needs are $10,000 and will be $5,000 each year during the entire period of the project (from year 1 to year 4). NWC is recovered each year. The firm believes it can sell the equipment in year 4 for $12,000. The marginal tax rate is 34% and the firm’s WACC is 7%. Use the provided Excel template on Moodle and decide based on both NPV and IRR rules.
Year 3-year 5-year 7-year
0
1 33.33% 20% 14.29%
2 44.44% 32% 24.49%
3 14.82% 19.20% 17.49%
4 7.41% 11.52% 12.49%
5 11.52% 8.93%
6 5.76% 8.93%
7 8.93%
8 4.45%