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Case 11 Chicago Valve Company

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Explain the inputs into
1) The net initial investment outlay at year 0?
The initial investment at year 0 is $200,000 which includes taxes and delivery, and the cost to install the equipment $12,500. Therefore the total net cost of initial investment outlay at year 0 is $212,500. 2) The depreciation tax savings in each year of the projects economic life? The depreciation tax savings in each year of the project’s economic life will show how much the tax savings will be depreciated each year using the MACRS method. 3) The projects incremental cash flows? These cash flows are those that are relevant to the valuation of the project. In this case it is depreciation. Using the MACRS we can determine for how much the project will be depreciated and what the net cash flows will be after tax and after depreciation. This cash flows are the sum of the depreciation tax saving and the after-tax cost saving.
This shows the company’s profit for each of the eight years. 4) What is the project’s NPV? Explain the economic rationale behind the NPV. Could the
NPV of this particular project be different for Lone Star Petroleum Company than for one of Chicago Valve’s other potential customers?
From the calculations, the NPV is ($17301). (revise) The NPV process helps investors determine whether or not projects are profitable. There is a very important concept in finance: time value of money. One dollar today is worth more than 1 dollar in the future.
Since the net cash flows here are future projections, it is necessary to bring the value of the investment to its present value. If the present value is positive, the project will be profitable; therefore, it can be approved. If the NPV is negative, the project should be rejected since the costs of investment exceed the returns.
3. Calculate the proposed project’s IRR. Explain the rationale for

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