Evaluating a project for a small manufacturing firm

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Reference no: EM13722766

You are evaluating a project for a small manufacturing firm. The firm has provided the following information: the initial cost of the project is $2,500 for equipment purchase; the CCA rate is 10 percent; tax rate is 25 percent; and the pre-tax cash flow in the first year is $900. Cash flows are expected to increase at 5 percent a year for four years. At the end of the fourth year, the project will end and the machinery acquired to start the project will be scrapped (zero salvage value). The appropriate discount rate is 7 percent.

1) Should the firm accept the project?

2) You have also obtained the following information about the best- and worst-case scenarios. In the best case, the cash flow in the first year will be $1100 and will grow at 6 percent a year. In the worst case, the cash flow in the first year will be $600 and will grow at 2 percent a year. The base case was presented above and everything else is the same for the base-, best-, and worst-case scenarios. Calculate the NPV of the best case and the NPV of the worst case. Based on the NPVs of the base, best, and worst cases, what’s your decision—should the firm accept the project?

Reference no: EM13722766

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