Case95QuestionsPalmer1

2187 words 9 pages
QUESTIONS
1. Table 1 contains the complete cash flow analysis 6 on GP Manufacturing’s basic information. Explain the inputs into 1) the net initial investment outlay at year 0, 2) the depreciation tax savings in each year of the project’s economic life, and 3) the project’s incremental cash flows?

1) $302,040 net initial investment includes:
($285,000) delivered cost
($18,000) installation cost
($2,500) removal cost
$4,000 current market value
($1,440) tax on proceeds
2) For year 1 the new system depreciated by 20 percent. Multiply that by the net initial investment and you get the total amount depreciated after 1 year, equal to $60,588. With a 36 percent tax rate you get the depreciated tax savings of $21,812.
Year 2- 32% depreciated
…show more content…
Essentially, we made out money back plus 8%/. Any alternative projects we consider should return more than that for us to accept it over this project assuming all projects compared are mutually exclusive.

7. Under what conditions do NPV, IRR, MIRR, and PI all lead to the same accept/reject decision?

NPV, IRR, MIR and PI lead to the same accept/reject decision for independent projects. Mutually exclusive projects however, can have conflicts in these measures.

When can conflicts occur? Conflicts are possible when projects are mutually exclusive in that the projects may be ranked differently for each measure.

If a conflict arises, which method should be used, and why?

When conflicts arise, it is best to use NPV since it directly illustrates the value added to shareholder wealth for each project. However, when there are wide variances in the rankings for the other measures, they should be looked at more closely since they could show a wider margin of error when the actual cash flows may not be close to what was projected, or when there is a great deal of difference in the size of the investment.

8. Suppose Congress reinstates the investment tax credit (ITC), which is a direct reduction of taxes equal to the prescribed ITC percentage times the cost

Related