A client of your financial consulting firm, Cab Manufacturing Company, is considering a new investment proposal that involves manufacturing and selling self-driving taxi cabs. You are asked to create the NPV analysis.
Your client has assembled the following information:
A new machine will have to be purchased today (Year 0) at a cost of $120,000.
It will generate revenues, all of which are taxable, expected to be $265,000, $240,000, and $215,000 in each of the three years (Years 1, 2, and 3) of the project's life.
Gross profit expected to be 30% of sales revenue.
The new machine will be depreciated straight-line down to its salvage value of $0 over the three-year life of the project.
The tax rate of the client is 21%. The company has a WACC of 14%
To complete the analysis, you will need to answer the questions. Show work.
1. What will be the net cash flow in year 0 (a positive number means cash inflow, a negative number means cash outflow)?
2. What is the NPV of the project?
3. What is the payback period in years?
4. What is the IRR?