Question

Hoffman company is considering a project that would have a five-year life and require a $3,200,000 investment in equipment. At the end of the five years, the project would terminate and the equipment would have no salvage value. The project would provide the following expected forecasts: Sales $ 5,000,000 Variable expenses $3,000,000 Fixed expenses (including depreciation) $1,600,000 The company’s tax rate is 20% and the WACC is 12% REQUIRED Compute the project’s NPV, IRR, payback period, discounted payback period, and profitability index.

Answer 1

To assess the Hoffman company's project, financial metrics including NPV, IRR, payback period, discounted payback period, and profitability index would be calculated using forecasted cash flows and the company's WACC.

Step-by-step explanation:

The Hoffman company is evaluating a business project that requires an initial investment and has forecasted cash flows over five years, with no salvage value for the equipment at the end. To assess the viability of the project, one would need to calculate various financial metrics such as Net Present Value (NPV), Internal Rate of Return (IRR), payback period, discounted payback period, and profitability index. These calculations involve discounting forecasted cash flows at the given Weighted Average Cost of Capital (WACC) to determine the value of future cash flows in today's terms. The NPV helps determine whether the project's return exceeds the WACC, while the IRR provides the break-even rate of return. The payback period tells us how long it will take to recoup the initial investment, and the discounted payback period adjusts this for the time value of money. Lastly, the profitability index offers a relative measure of a project's profitability.