Task 4 Year Cash Flow 15% Rate of Return Present Value
0 $(3,000,000.00)
1 $1,100,000.00 $956,521.74
2 $1,450,000.00 $1,260,869.57
3 $1,300,000.00 $1,130,434.78
4 $950,000.00 $826,086.96 Less Investment $(3,000,000.00) $3,450,866.74 1. IRR % IRR= 22.38%
2. NPV NPV= $3,450,866.74 3. Should the company accept this project and why? I believe the company should look into this. The IRR is greater than the Required Rate of Return and the overall NPV is a gain. There does not appear to be a loss in this asset. 4. Explain how depreciation will affect the present value of the project. Depreciation would cause the project's PV to go up. This would be a good thing when considering the amount of taxes the company would save. 5. Provide examples of at least one of the following as it relates to the project: a. Sunk Cost - costs that are non-recoverable and shouldn't be used when considering an investment decision. An example of this would be AirJet has already purchased delivery trucks to deliver parts to vendors/customers. This cost would not be taken into consideration because it has no affect on the purchase of a new machine. This was a purchase that was done prior to any decisions made about buying the new machine. b. Opportunity Cost - This is the most valuable alternative that is given up if a particular investment is undertaken. Most of the time, these costs are overlooked. Example: The managers of AirJet are all called into a company-wide meeting. During this 2 hour meeting, they could have been out on the plant floor making production decisions or solving a problem that may have incurred during this time. This could be a negative type of cost. Positive way, the managers could have their meeting during lunch or possibly on a