SAC is evaluating a project using analytical tools: NPV, IRR, MIRR, Payback period

See attached file.

SAC is considering the purchase of new equipment to manufacture specialty spark plugs. The new equipment would allow the firm to manufacture 100,000 additional spark plugs per year and is expected to have a useful life of 5 years and to have no salvage value at that time. SAC will depreciate the equipment using the straight-line method. Specialty spark plugs are selling for an average price of $20 and are expected to cost $8 to manufacture with the new equipment. Indirect costs are expected to remain the same. The equipment will cost $3,000,000 to purchase and install. SAC's tax rate is 34%.

The company has the following capital structure and intends to keep its capital structure intact in financing this equipment. Use appropriate analytical tools to determine if SAC should purchase the new equipment. Describe how you arrived at your recommendation and show your work.

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...plesofaccounting, 2009)

SAC's project of new manufacturing equipment is having NPV of
$699,708.79 which is positive and one should accept the project.

IRR
Internal rate of return is the return at which present value of cash inflows are equal to initial investments. In other words, it is the discount rate that would cause the net present value to be zero. (principles of accounting, 2009)

But The IRR Method cannot be used to evaluate projects where there are changing cash flows (e.g., an initial outflow followed by in-flows and a later out-flow, such as may be required in the case of land reclamation by a mining firm);

Use of the IRR Method can lead to the belief that a smaller project with a shorter life and earlier cash inflows is preferable to a larger project that will generate more cash. (Wiki, 2009)

The IRR of SAC is 19.7% which is more than cost of capital of 11%. Hence one can accept the project.

NPV is superior to IRR in following ways:
NPV Method is preferred over other methods since it calculates additional wealth and the IRR Method does not;

? The IRR Method cannot be used to evaluate projects where there are changing cash flows (e.g., an initial outflow followed by in-flows and a later out-flow, such as may be required in the case of land reclamation by a mining firm);
Use of the IRR Method can lead to the belief that a smaller project with a shorter life and earlier cash inflows is preferable to a larger project that will generate more cash.

http://www.wikicfo.com/Wiki/(S(1nhsmbmf20maiubpifwpu245))/NPV%20vs%20IRR.ashx

MIRR
While the internal rate of return (IRR) assumes the cash flows from a project are reinvested at the IRR, ...