Finance assignment – accept or reject the project

Mid-Term Assignment: Accept or Reject the Project?

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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%

 

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 calculations.

     

 

Correctly calculated the payback period.