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Busn379

AirJet Best Parts Financial Analysis

A financial decision for the purchase of new equipment will be based on the projects IRR and NVP. Below I have included the IRR and NPV to help assist in the financial decisions for the project.

Capital budgeting for a new machine

1.) The IRR is 22.38%

2.) The NVP is $450,867.00

NVP formula is as followed:

Year 1 = 1100000/(1+0.15)^1 = 1100000/1.15 = 956521.74

Year 2 = 1450000/(1+0.15)^2 = 1450000/1.3225 = 1096408.32

Year 3 = 1300000/(1+0.15)^3 = 1300000/1.52087 = 854771.1

Year 4 = 950000/(1+0.15)^4 = 950000/1.74901 = 543165.58

Year Cash flow x15% Present Value

1 1,100,000 0.8696 $956,522

2 1,450,000 0.7561 $1,096,408

3 1,300,000 0.6575 $854,771

4 950,000 0.5718 $543,166 Total (3,000,000) NVP $450,867.00

3.) In my opinion the company should accept the project based on the financial gain of the project.

4.) Depreciation can have varying affects on different projects. In the case of this project depreciation would actually be a positive thing. Deprecation in an accounting income typically does not reduce cash flows. In fact, they can have a significant positive impact on cash flows, if they affect the tax liability of the firm. In this case it would be positive for the company because it would save on taxes while increasing present value.

5.) Examples as related to the project:

a. Sunk cost- A cost that cannot be recovered because the funds are already spent. An example of a sunk cost for AirJet best Parts could be: AirJets Best made an investment of $500,000 to provide project research through an extensive survey. This would be a sunk cost because once the survey was completed the money could not be recovered.

b. Opportunity Cost- This is the cost of giving up one thing for another. An example of opportunity cost for AirJet Best...

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