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DOGSRULE Company is contemplating the purchase of a new piece of equipment that would cost $350,000. The equipment has a four-year life. It will depreciate straight-line. At the end of the project the company will sell the equipment for $40,000. You will save $130,000 before taxes per year and you will be able to reduce net working capital by $50,000. If the tax rate is 21%, what is the IRR?
a. Draw a timeline showing all cashflows. - In time zero, you must consider the initial cost of the equipment AND the reduction in net working capital. If you reduce the NWC, it is a positive cashflow to the project. Next, calculate depreciation and then OCF using OCF=EBIT+D-T. (You could alternatively use the "tax shield approach" and get the same OCF. OCF = (S-C)(1-t) + Dt. )Plot on the timeline. Then consider the AFTER-TAX salvage value of the project the final year. You also have to consider the NWC increase at the completion of the project.
b. If there is a hurdle rate of 11%, calculate the NPV. Should you accept or reject the project? Why?
Finance is about Gunns Ltd, a company in dealing with forestry products in Australia. The company has also been listed in Australian Stock Exchange. As many companies producing forestry products, even Gunns Ltd is facing various problems. Due to the ..
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