What discount rate will this project break even

Assignment Help Financial Management

Reference no: EM131607879

A firm believes it can generate an additional $4,000,000 per year in revenues for the next 5 years if it replaces existing equipment that is no longer usable with new equipment that costs $5,100,000. The new equipment will likely be able to be sold for $100,000 at the end of the project (after 5 years). The additional sales will require an initial investment in net working capital of $400,000, which it expects to recover at the end of the project (after 5 years). The existing equipment has a book value of $25,000 and a market value of $20,000. The contribution margin is expected to be 55% of revenue. Assume the firm uses straight-line depreciation, its marginal tax rate is 35%, its weighted-average cost of capital is 14%, and the risk of this project is similar to the risk of its other projects.

a) When will the initial cash outflow be recovered?

b) How much value will this new equipment create for the firm?

c) At what discount rate will this project break even?

d) Should the firm purchase the new equipment? Be sure to justify your recommendation.

e) How would your analysis change if this project was less risky than the firm’s other projects? Be specific.

Reference no: EM131607879

Questions Cloud

How is income summary closed : How is Income Summary closed if the company had a net income? Which of the following could be recorded as a reversing entry

Write down your recommendations to kevin : Kevin told his girlfriend all about the confidential information. Do you think Kevin acted appropriately?

Consensus forecast of financial analysts is dividend : A company just paid a dividend of $1.30 per share. The consensus forecast of financial analysts is a dividend of $1.70 per share next year,

What would be a fair price for this block today : If the required rate of return is 12% per year, what would be a fair price for this block today?

What discount rate will this project break even : When will the initial cash outflow be recovered? At what discount rate will this project break even?

What effects would the insolvency of your company : From a global perspective, what effects would the insolvency of your company have on the U.S. economy as well as the global economy

Prepare an analysis of the potential project costs : Prepare an analysis of the potential project costs for the following scenarios. Note: There is no need for gravel in the resurfacing scenario

Future spot rates for in the money and out of the money : What are the future spot rates for “in the money” and “out of the money”? What is the spot rate for the breakeven point (zero net profit) for this option?

What would be a tag price for the stock today : what would be a tag price for the stock today?

User Account

All Pages