# Matrix And Almand-2 Questions

Question 1

You have been asked by the president of MATRIX to evaluate the proposed acquisition of new equipment. The equipment’s basic price is \$177,000, and shipping costs will be \$3,500. It will cost another \$26,600 to modify it for special use by your firm, and an additional \$12,400 to install the equipment. The equipment falls in the MACRS 3-year class, and it will be sold after three years for \$22,000. The equipment is expected to generate revenues of \$173,000 per year with annual operating costs of \$81,000. The firm’s tax rate is 30.0%. Your company uses the 3-year MACRS method to depreciate the machine and equipment, which are 33% 45%, 15% and 7%. The cost of capital is 11%.

What is the net investment/initial outlay for the project?

Question 2

ALMAND Corporation is considering an expansion project. To date they have spent \$75,000 investigating the viability of the project and have decided to proceed. The proposed project will cost \$450,000 in addition to the \$75,000 that was spent on the feasibility study. The project will be depreciated over a 3 year MACRS class life. XYX would use the 3-year MACRS method to depreciate the machine and equipment which are 33% 45%, 15% and 7%.

If the project is undertaken the company will need to increase its inventories by \$50,000, and its accounts payable will rise by \$10,000. The company will realize an additional \$600,000 in sales over each of the next four years. The company’s operating costs (not including depreciation) will increase by \$400,000 a year. The company’s tax rate is 40%. At t = 3, the project’s economic life is complete, but it will have a salvage value (before-tax) of \$50,000 after three years. The project’s WACC is 9.5%.

What is the project’s net present value (NPV)? What is the IRR? Should the project be accepted? Why or why not?

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