In this assignment, you will undertake calculations in order to


 

In this assignment, you will undertake calculations in order to evaluate a project, and decide if it should be accepted or rejected. 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%

Tasks:

  • 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 or 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?

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