Suppose firm is considering labor-saving investment

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Suppose a firm is considering a labor-saving investment. In year 0, the project requires an $11,700 investment in equipment (all figures are in thousands of dollars). This investment is depreciated using the straight-line method over five years and there is salvage value in year 5 of $4,500. With or without the cost-reducing investment, all cash flows start in year 1 and end in year 5. The inflation rate is 2.6% in year 1 and declines to 1.4% in year 5; the real growth rate is 21.3% in year 2 and declines to 9.5% in year 5 (assume both fall in a straight-line fashion). The tax rate is 41.0% in all years. The cost of capital is 15%. Without the cost-reducing investment, the firm's existing investments will generate year 1 revenue, labor costs, other cash expenses, and depreciation of $15,200, $4,100, $5,300, and $3,300, respectively. With the cost-reducing investment, the firm's year 1 labor costs will be $1,600 and revenues and other cash expenses will remain the same. What is the cost-reducing project NPV and IRR? Should the firm undertake the project? Please, it needs to be an excel.

Reference no: EM131297999

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