Texas Roks, Inc. is considering a new quarry machine. The costs and revenues associated with the machine have been provided to you for analysis:
Cost of the new project
$4,000,000
Installation costs
$100,000
Estimated unit sales in year 1
50,000
Estimated unit sales in year 2
75,000
Estimated unit sales in year 3
40,000
Estimated sales price in year 1
$150
Estimated sales price in year 2
$175
Estimated sales price in year 3
$160
Variable cost per unit
$120
Annual fixed cost
$50,000
Additional working capital needed
$435,000
Depreciation method
3 years straight-line method, no salvage value
Texas Rok’s tax rate
40%
Texas Rok’s cost of capital
13%Required:
Calculate operating cash flow and the change in net working capital. Determine the NPV and IRR of the project. Should the company accept or reject the project based on the NPV? Why? Should the company accept or reject the project based on the IRR? Why? What is your final accept or reject decision? Why? What is the payback period for this project? Would this influence your decision to accept or reject? Submit your findings to the above questions in a Microsoft Word or Excel document. Use an Excel document to illustrate your calculations.
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