[SPLIT] At what rate of capital does this project break even?

[Hors]

Felix Industries purchased a grinder 4 years ago for $15,000.

It is being depreciated on a straight-line basis over 9 years to an estimated salvage value of zero. It could be sold now for $7,000.

The firm is considering selling it and purchasing a new one. The new grinder would cost $20,000, and have both an expected economic life and a MACRS class life of 5 years, with no expected salvage value. Installation charges will be $2,000.

Management estimates that the new grinder will allow total production increases (resulting in additional sales) of $3000 the first year and $7,000 in years 2-5, but maintenance and other charges would increase by $1,000. The new grinder will require an initial $3,500 working capital investment, which will be recovered at the end of the project.

This project is estimated to be about as risky as other projects in the company. Felix’s cost of capital is 11% and its marginal tax rate is 40%.

* Calculate the NPV of this project.
* At what rate of capital does this project break even? (MACRS by year: 20%, 32%, 19%, 12%, 11%, 6%.)
* Do you recommend acceptance or rejection?

 

[Deleted member 4993]

Felix Industries purchased a grinder 4 years ago for $15,000. It is being depreciated on a straight-line basis over 9 years to an estimated salvage value of zero. It could be sold now for $7,000. The firm is considering selling it and purchasing a new one. The new grinder would cost $20,000, and have both an expected economic life and a MACRS class life of 5 years, with no expected salvage value. Installation charges will be $2,000. Management estimates that the new grinder will allow total production increases (resulting in additional sales) of $3000 the first year and $7,000 in years 2-5, but maintenance and other charges would increase by $1,000. The new grinder will require an initial $3,500 working capital investment, which will be recovered at the end of the project. This project is estimated to be about as risky as other projects in the company. Felix’s cost of capital is 11% and its marginal tax rate is 40%. Calculate the NPV of this project. At what rate of capital does this project break even? (MACRS by year: 20%, 32%, 19%, 12%, 11%, 6%.) Do you recommend acceptance or rejection?

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