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Finance & Accounting
Pages 4 (1004 words)
1. For IRR we keep NPV equals to zero and by using financial calculator we get 22.3% 2. Project’s NPV is calculated as follows: 3. The company should accept this project for two key reasons. Firstly, the rate of return that the company will get is above their required rate of return for it.
This increases your positive cash flows for the project and ultimately resulting in higher NPV. A company which opts for incremental method of depreciation will have higher cash flows in the initial years and it will reduce by the time it reaches its expiry. On the other hand, a company which opts for straight line method will have equal positive cash flows every year. Lastly, Depreciation of $10,000 per year, with an income tax of 40%, saves $4,000 and that amount is accounted as a positive cash flow. 5. Opportunity cost is the profit forgone by not investing in a particular opportunity. It is particularly pertinent to this project as the company may have other investment opportunities which they overruled for this particular investment. (Shim & Siegel, 2008)For example, if this money was not invested in the purchase of a machinery, it may have been deposited in a bank and earn a decent enough return without any substantial risk. Moreover, this could have been distributed among shareholders as dividend or the money could have been used to purchase any other equipment with different set of anticipated cash flows. Therefore, the cost of not depositing that money in the bank or distributing as dividend or not purchasing any other equipment is the opportunity cost of the project. 6. ...
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