In this assignment, you will undertake calculations in order to evaluate a project, and decide if it should be accepted or rejected. Texas Roks, Inc. is considering a new quarry machine. The costs and revenues associated with the machine have been provided to you for analysis:
Cost of the new project
$4,000,000
Installation costs
$100,000
Estimated unit sales in year 1
50,000
Estimated unit sales in year 2
75,000
Estimated unit sales in year 3
40,000
Estimated sales price in year 1
$150
Estimated sales price in year 2
$175
Estimated sales price in year 3
$160
Variable cost per unit
$120
Annual fixed cost
$50,000
Additional working capital needed
$435,000
Depreciation method
3 years straight-line method, no salvage value
Texas Rok’s tax rate
40%
Texas Rok’s cost of capital
13%
Tasks:
- Calculate operating cash flow and the change in net working capital.
- Determine the NPV and IRR of the project. Should the company accept or reject the project based on the NPV or IRR? Why?
- What is your final accept or reject decision? Why?
- What is the payback period for this project? Would this influence your decision to accept or reject?
