Porter and Alexander

Description

Read the case and answer the questions below:

1. Should the Automotive Division invest in labor-saving equipment?

2. Suppose Ms. McKita decides to use straight-line depreciation over 3 years. What would happen to the project’s NPV?

3. Suppose now that in addition to labor savings and quality improvements, the new equipment is expected to enhance working capital productivity. Specifically, suppose that the firm’s expected required investment in work-in-progress inventory will decline from 20 percent of sales to 15 percent of sales. How, if at all, would this change Ms. McKita’s analysis and conclusions? (Use 3-year MACRS Depreciation Schedule as before.) Note: remember, this project lasts for 5 years. At the end of that period, operations return to “normal.”

4. Suppose that the project is financed 50% with debt and 50% equity. Where do the interest costs show up in the analysis?

5. With the data that she has, could Ms. McKita calculate the payback period? Could she calculate the IRR?