Assignment 2: Mid-Term Assignment: Accept or Reject the Project?
Assignment 2: Mid-Term Assignment: Accept or Reject the Project?
In this assignment, you will undertake calculations in order to evaluate a project, and decide if it should be accepted or rejected.
Texas Roks, Inc. is considering a new quarry machine. The costs and revenues associated with the machine have been provided to you for analysis:
Cost of the new project | $4,000,000 |
Installation costs | $100,000 |
Estimated unit sales in year 1 | 50,000 |
Estimated unit sales in year 2 | 75,000 |
Estimated unit sales in year 3 | 40,000 |
Estimated sales price in year 1 | $150 |
Estimated sales price in year 2 | $175 |
Estimated sales price in year 3 | $160 |
Variable cost per unit | $120 |
Annual fixed cost | $50,000 |
Additional working capital needed | $435,000 |
Depreciation method | 3 years straight-line method, no salvage value |
Texas Rok's tax rate | 40% |
Texas Rok's cost of capital | 13% |
Required:
- Calculate operating cash flow and the change in net working capital.
- Determine the NPV and IRR of the project.
- Should the company accept or reject the project based on the NPV? Why?
- Should the company accept or reject the project based on the IRR? Why?
- What is your final accept or reject decision? Why?
- What is the payback period for this project? Would this influence your decision to accept or reject?
Submit your findings to the above questions in a Microsoft Word or Excel
Use an Excel document to illustrate your calculations
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Rating:
/5
Solution: Assignment 2: Mid-Term Assignment: Accept or Reject the Project?