Project 5
Complete the following problem using excel by August 2nd at 6 PM Central time. Send via the assignment area.
You will be graded based off your usage of excel and the accuracy of your answer.
You should use the NPV and IRR functions that are available through excel. DO NOT use the PV table figures. You will lose 5 pts. If you do not use the NPV and IRR Excel functions.
Please make sure you look at the demonstration exercise I have posted for chapter 21.
You need to use cell references and functions whenever possible.
ABC Company is considering the purchase of a computer-aided manufacturing system.
The annual before tax cash benefits/savings associated with the system are described below:
Decreased Waste cost
Decrease in operating costs
Increase in on-time deliveries savings $70,000
50,000
75,000 The system will cost
$450,000
Useful life
8 years
Salvage value
0
Cost of Capital
10%
Tax Rate
32% Hint: Don’t forget to compute net of tax amount. Look at ex 21-19 page 760 .
Depreciation method Straight line Hint: Don’t forget the depreciation tax shield.
Also, do not use first year half year depreciation—Just do plain straight line.
Required:
Prepare your solution on the worksheet entitled Solution.
1. Compute the net annual after-tax cash benefits and savings. Use the information above to compute the total annual savings and then you need to compute the net of tax savings.
2. Compute the depreciation tax shield.
3. Set up a table showing the outflow and annual cash inflow.
4. Calculate the payback period for the system. Assume that the company has a policy of only accepting
projects with a payback of 5 years or less. Should the company buy the system based on the payback period criteria? Why?
5. Calculate the NPV and IRR for the projects. Should the system be purchased based on the NPV and IRR criteria? Why or Why not?
