Lowell Company is considering adding a robotic paint sprayer to the production line.  The prayer’s base price is $100,000, and it would cost another $10,000 to install it.  The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $33,000.  The MACRS rates for the first three years are 33%, 45%, and 15%.  The machine would require and, increase in net working capital of $6,600.  The sprayer would not change revenues, but it is expected to save the firm $40,000 per year in before tax operating costs, mainly labor.  Lowell’s marginal tax rate (federal plus state) is 25%.  If the project’s cost of capital is 6%,  What is the TOTAL FREE CASH FLOW FOR YEAR 3?   Free cash flow = Total Initial Investment + Total annual project CF + Total Salvage Value     $70,250     $64,550     $67,400     $64,800

Gina Ripley, president of Dearing Company, is considering the purchase of a computer-aided manufacturing system. The annual net cash benefits and savings associated with the system are described as follows: The system will cost 9,000,000 and last 10 years. The companys cost of capital is 12 percent. Required: 1. Calculate the payback period for the system. Assume that the company has a policy of only accepting projects with a payback of five years or less. Would the system be acquired? 2. Calculate the NPV and IRR for the project. Should the system be purchasedeven if it does not meet the payback criterion? 3. The project manager reviewed the projected cash flows and pointed out that two items had been missed. First, the system would have a salvage value, net of any tax effects, of 1,000,000 at the end of 10 years. Second, the increased quality and delivery performance would allow the company to increase its market share by 20 percent. This would produce an additional annual net benefit of 300,000. Recalculate the payback period, NPV, and IRR given this new information. (For the IRR computation, initially ignore salvage value.) Does the decision change? Suppose that the salvage value is only half what is projected. Does this make a difference in the outcome? Does salvage value have any real bearing on the companys decision?

Markoff Products is considering two competing projects, but only one will be selected. Project A requires an initial investment of $42,000 and is expected to generate future cash flows of $6,000 for each of the next 50 years. Project B requires an initial investment of $210,000 and will generate $30,000 for each of the next 10 years. If Markoff requires a payback of 8 years or less, which project should it select based on payback periods?

Caduceus Company is considering the purchase of a new piece of factory equipment that will cost $565,000 and will generate $135,000 per year for 5 years. Calculate the IRR for this piece of equipment. For further instructions on internal rate of return In Excel, see Appendix C.