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Burton Sensors

Burton should purchase new Thermo-well machines. The investment generates a positive net present value (NPV) of $961,970 and an internal rate of return (IRR) of 22%, which is above Burton's weighted average cost of capital (WACC) of 4.19%. The machines will save $1.4 million in costs initially and over their 7-year useful life, while requiring an initial investment of $600,000 and additional working capital of $650,000. The positive NPV and IRR above the WACC indicate the investment will improve Burton's overall profitability.

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629 views2 pages

Burton Sensors

Burton should purchase new Thermo-well machines. The investment generates a positive net present value (NPV) of $961,970 and an internal rate of return (IRR) of 22%, which is above Burton's weighted average cost of capital (WACC) of 4.19%. The machines will save $1.4 million in costs initially and over their 7-year useful life, while requiring an initial investment of $600,000 and additional working capital of $650,000. The positive NPV and IRR above the WACC indicate the investment will improve Burton's overall profitability.

Uploaded by

Sankalp Mishra
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Q. Should Burton purchase new thermowell machines?

A. The company should purchase the Thermo-well machines, as it generates a positive NPV of
$961,970, with an IRR of 22%. The company’s WACC is 4.19%, which is less than the internal rate of
return provided by the investment in Thermo-well machines.

Risk Free Rate, rfr 3%


Risk Premium, rpm 6.5%
Rate on Debt, rd 4.8%
Rd(1-T) 3.12%
Beta (Based on comparable company) 1.25
Rate on Equity 11.10%
Weight of debt, wd 84.7%
Weight of equity, we 15.3%
Tax Rate 35%
WACC 4.33%

Purchase of Thermowell Machines

Industry CAGR 4.5%


Outside Purchase – Savings $1,400,000
Initial Cost of Thermowell Machines $600,000
Number of machines 4
Useful life in Years 7
Material & Rent Expense $780,000
Working Capital $650,000

  2016 2017 2018 2019 2020 2021 2022 2023


Initial
 $600,00
Cost  
0
Outlay
 $650,00
WCI  
0
Cost
$1,400,0 $1,463,00 $1,528,8 $1,597,63 $1,669,52 $1,744,65  $1,823,1
Saving
00 0 35 3 6 5 64
s
Less:
Expen  
se
Salary
 $170,00
expen  $170,000  $170,000  $170,000  $170,000  $170,000  $170,000
0
se
Materi  $780,00  $815,100  $851,780  $890,110  $930,165  $972,022  $1,015,7
al & 0 63
Rent
Expen
se
Depre
 $85,714  $85,714  $85,714  $85,714  $85,714  $85,714  $85,714
ciation
Total
 $364,28
Incom  $392,186  $421,341  $451,809  $483,647  $516,919  $551,687
6
e
Add:
Depre  $85,714  $85,714  $85,714  $85,714  $ 85,714  $85,714  $85,714
ciation
Less:  $127,50
 $137,265  $147,469  $158,133  $169,277  $180,921  $193,090
Taxes 0
Total
Cash
outflo ($1,250,  $322,50
 $340,635  $359,586  $379,390  $400,085  $421,711  $444,311
w/ 000) 0
Inflow
s

Net Present Value: $947,555.38

Internal Rate of Return: 21.97%

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