CheapO is evaluating the purchase of a new crane system for $1,000,000. If they purchase this system, revenues will increase by $250,000 and associated expenses will increase by 65% of revenues. The installation of the system is expected to cost $100,000 and require training of another $25,000. Because of the increase in business expected by the purchase of the system Accounts Receivable is expected to increase by $30,000. The company expects to use this machine for 10 years after which it will have no salvage value. Assume simplified straight-line depreciation and that this machine has been depreciated down to zero, a 20% marginal tax rate, and a required rate of return of the WACC you previously calculated.
WACC = 8.316% or 8.32%
What is the initial outlay associated with this project?
What are the annual after-tax cash flows associated with this project for years 1 through 9?
What is the terminal cash flow in year 10 (what is the annual after-tax cash flow in year 10 plus any additional cash flows associated with termination of the project)?
What is the project’s NPR and IRR?
What would be your decision about acquiring this asset? Why?
Of the 4 types of capital budgeting techniques described in this course, which one do you prefer? Explain.