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Q1) Historically, Brisbane Inc. has purchased a subcomponent used in its primary product from a local firm. Brisbane is now considering producing the subcomponent itself. In order to produce the subcomponent, Brisbane will need to purchase a new machine at a cost of $750,000 and invest $100,000 in additional net working capital. Currently, the total cost of purchasing the subcomponent is $800,000 per year. Brisbane estimates that the cost of manufacturing the subcomponent would be $500,000 per year. For its capital-budgeting analysis, Brisbane will use a seven-year planning horizon, which coincides with the useful life of the new machine. Brisbane’s marginal tax rate is 35%, and the discount rate which reflects the risk of this project’s cash flows is 14%.
Ignoring CCA and salvage, what are the payback period (PBP) and internal rate of return (IRR) for the proposed project.? Please show step by step calculations.
a) PBP = 2.833 years; IRR = 13.468%
b) PBP = 3.846 years; IRR = 17.683%
c) PBP = 4.359 years; IRR = 13.468%
d) PBP = 4.359 years; IRR = 17.683%
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