Question: The problem: You are an intern at Gartner. You have been asked by your boss to evaluate the acquisition of the production equipment for the purpose, after a 1-year research that cost the company $800,000. The acquisition base price of the equipment is $1.7 million and it would cost another $300,000 to modify it to filter lights from certain angles. The equipment will be depreciated, for tax purposes, on a 10- year MACRs system and will be sold after 6 years for $600,000 on the market. Use of the equipment would require a Net Working Capital (spare parts, inventory) of 8% of the following year's sales. Sales are projected to be $700,000 in the 1st year but would increase by 10% per year until competitors flood the market in year 6. Total production costs are expected to be $250,000 per year. Gartner's marginal tax rate is 40% and its cost of capital is 12%
a) What is the investment outlay (total investment, including NWC) in Year 0 associated with this project?
b) What are the incremental operating cash flows in years 1 to 6?
c) What is the terminal cash flow in Year 6?
d) Find the payback period of the project
e) Find the discounted payback period of the project
f) Find the NPV of the project g) Find the Profitability Index of the project
h) Find the IRR of the project i) Find the MIRR of the project
j) Based on your findings, should Gartner go ahead with the project? Explain, briefly
k) Should Garner go ahead with the project if their cost of capital is 15%?