Internal Rate of Return and Net Present Value Analysis for Bombardier Project

What is the Internal Rate of Return on the project?

To determine the Internal Rate of Return (IRR) on the project, we need to calculate the cash flows associated with the project and find the discount rate at which the Net Present Value (NPV) becomes zero. The cash flows include the initial investment, cash inflows from sales over eight years, and the salvage value of the machinery. By setting the NPV equal to zero and solving for the discount rate, we can find the IRR. Let's calculate the IRR for the Bombardier project.

Calculating Internal Rate of Return (IRR)

The cash flows for the Bombardier project can be calculated as follows: Year 0: Initial Investment: - New Machinery: -$2,100,000 - Working Capital: -$365,000 Years 1-8: Cash Inflows from Sales: - Sales Revenue: Calculated based on projected unit sales and pricing - Material Cost per Unit: $67,500 - Annual Price Increase: 3.5% - Material Cost Growth Rate: 4% - Fixed Costs per Annum: -$670,000 - Tax Rate: 26.4% Year 8: Salvage Value: - Salvage Value of Machinery: $396,361.73 Next, we calculate the Net Present Value (NPV) of the project using the required rate of return (Weighted Average Cost of Capital) of 3.90%. The NPV formula considers cash flows from each year discounted back to present value. To find the IRR, we set NPV to zero and solve for the discount rate that makes it zero. The IRR represents the discount rate at which NPV equals zero, indicating the project's profitability. Now, let's calculate the Internal Rate of Return (IRR) for the Bombardier project.

What is the Net Present Value of the project if the required rate of return (Weighted Average Cost of Capital) is equal to 3.90%?

To calculate the Net Present Value (NPV) of the project with a required rate of return (Weighted Average Cost of Capital) of 3.90%, we use the formula: NPV = Cash flow Year 0 / (1 + WACC)^0 + Cash flow Year 1 / (1 + WACC)^1 + ... + Cash flow Year 8 / (1 + WACC)^8. By discounting all cash flows back to their present value using the WACC, we can determine the NPV. Let's calculate the Net Present Value (NPV) for the Bombardier project with a WACC of 3.90%.

Calculating Net Present Value (NPV)

By discounting the cash flows from the project back to present value using the required rate of return of 3.90%, we can calculate the Net Present Value (NPV). The NPV represents the difference between the present value of cash inflows and outflows from the project. Now, let's calculate the Net Present Value (NPV) for the Bombardier project with a required rate of return of 3.90%.

By how much would the Net Present Value of the project change if unit sales were 25% less than expected (round down toward zero the number of units; the WACC is still 3.90%)?

To assess the impact of a 25% reduction in expected unit sales on the Net Present Value (NPV) of the project, we need to recalculate the cash inflows with the revised unit sales. By using the same discount rate (WACC), we can determine the new NPV and compare it to the original NPV to quantify the change in NPV. Let's calculate the change in Net Present Value (NPV) for the Bombardier project if unit sales were 25% less than expected.

Impact of Reduced Unit Sales

To analyze the effect of a 25% reduction in expected unit sales on the project's NPV, we need to adjust the cash inflows based on the revised unit sales. By recalculating the cash flows with the decreased unit sales and using the same discount rate of 3.90%, we can find the new NPV. Now, let's calculate the change in Net Present Value (NPV) for the Bombardier project if unit sales were 25% less than expected.
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