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Unit 6 Individual Assignment

Your final submission of the homework assignment must be submitted via Brightspace by the posted due date and time. The Assignment will be locked at the due date/time. Please contact me well ahead of the deadline if you have extenuating circumstances.

You must upload an Excel spreadsheet for your assignment, with formulas showing all calculations. If you wish, you may submit, in addition, a Word document or PDF with accompanying text.

Please name your file “Lastname, Firstname Unit 6”.

For this final unit, the assignment drills down from analyzing the company, as a whole, to analyzing specific initiatives.

Problem 1

A company has a 7.4% WACC and is considering two investments with the following net cash flows:

Yr 0 Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 6 Yr 7

Project A -$320 -$385 -$178 -$5 $452 $555 $888 -$100

Project B -$520 $115 $135 $155 $175 $195 $215    $0

a. What is each project’s NPV?

b. What is each project’s IRR?

c. If you had to choose one of these investments, which would you select, and why?

Problem 2

The Greener Green Company is considering purchasing additional equipment that would have an initial cost of $400,000. They estimate it would add $215,000 to pre-tax revenues and variable operating expense (before taking account of depreciation) per year of 37%, for the first 4 years. In Year 5, they will cease production, and therefore will have no additional revenues or ongoing operating costs, but will incur special shutdown costs of $45,000 (aside from depreciation).

The packaging machine will be depreciated on a straight-line basis, over 5 years, and will have no salvage value (ignore the MACRS depreciation methodology for this problem.)

Assuming a 25% marginal tax rate, and a 8.5% WACC, calculate the NPV of this investment.

Do you recommend this project? Why?

Good luck!