CheapO is evaluating the purchase of a new crane system for $1,000,000. If they purchase this system, revenues will increase by $250,000 and associated expenses will increase by 65% of revenues. The installation of the system is expected to cost $100,000 and require training of another $25,000. Because of the increase in business expected by the purchase of the system Accounts Receivable is expected to increase by $30,000. The company expects to use this machine for 10 years after which it will have no salvage value. Assume simplified straight-line depreciation and that this machine has been depreciated down to zero, a 35% marginal tax rate, and a required rate of return of the WACC you previously calculated.
WACC = 6.53%
What is the initial outlay associated with this project?
What are the annual after-tax cash flows associated with this project for years 1 through 9?
What is the terminal cash flow in year 10 (what is the annual after-tax cash flow in year 10 plus any additional cash flows associated with termination of the project)?
What is the project’s NPR and IRR?