Assignment 2: mid-term assignment: accept or reject the project

In this assignment, you will undertake calculations in order to evaluate a project, and decide if it should be accepted or rejected.

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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%

Required:

  1. Calculate operating cash flow and the change in net working capital.
  1. Determine the NPV and IRR of the project.
  1. Should the company accept or reject the project based on the NPV? Why?
  1. Should the company accept or reject the project based on the IRR? Why?
  1. What is your final accept or reject decision? Why?
  1. What is the payback period for this project? Would this influence your decision to accept or reject?

Deliverables:

  • Submit your findings to the above questions in a Microsoft Word or Excel document to the W3: Assignment 2Dropboxby Tuesday, December 9, 2014. Use an Excel document to illustrate your calculations.

Name your document(s) SU_FIN3030_W3_A2 _LastName_FirstInitial.

Assignment 2 Grading Criteria Maximum Points

Correctly calculated the operating cash flow and the change in net working capital.

50

Correctly calculated the NPV

50
Correctly calculated the IRR. 50

Correctly calculated the payback period.

20

Made the correct accept/reject decision and explained why.

20

Wrote in a clear, concise, and organized manner; demonstrated ethical scholarship in accurate representation and attribution of sources; displayed accurate spelling, grammar, and punctuation.

10
Total: 200