Kendall Corporation is considering a project that would require an initial inves
ID: 2476612 • Letter: K
Question
Kendall Corporation is considering a project that would require an initial investment of $1,530,000 and would have a useful life of 12 years. The annual net cash receipts would be $290,000. The salvage value of the assets used in the project would be $105,000. The company’s tax rate is 40%. For tax purposes, the entire initial investment without any reduction for salvage value will be depreciated over 12 years. The company uses a discount rate of 18%.
20.
Required information
Compute the net present value of the project by inputting the variables that are entered into your calculator / Excel. (If a variable is not used in the calculation, input a zero (0). Omit the "$" and "%" signs in your response.) Round answers to the nearest dollar and use a minus sign ( - ) for negative numbers.
Excel / calculator input:
Compute the internal rate of return of the project by inputting the variables that are entered into your calculator / Excel. (If a variable is not used in the calculation, input a zero (0). Omit the "$" and "%" signs in your response.) Round answers to the nearest dollar / whole number and use a minus sign (-) for negative numbers.
Excel / calculator input:
Compute the net present value of the project by inputting the variables that are entered into your calculator / Excel. (If a variable is not used in the calculation, input a zero (0). Omit the "$" and "%" signs in your response.) Round answers to the nearest dollar and use a minus sign ( - ) for negative numbers.
Explanation / Answer
Calculation of NPV Particulars Amount ( $ ) Net Cash Receipts per year 290000 Less: Depreciation Per Year ( 15,30,000 - 0 solvage value / 12 years) 127500 (straight line method of depreciation) Net Profit Before tax 162500 Less: Tax @ 40 % 65000 Net profit after tax - A 97500 Add: Depreciation - B 127500 (Non - cash Expenses) Total Cash Inflow Per Year (A+B) 225000 PV Annuty factor for 12 years , 18% is 4.7932 Cash Inflow from the project 1078470 (225000 * 4.7932) Add: PV of solvage of the asset in 12th Year (solvage value * PV factor for 12th year for 18% int) (105000 *0.1372) 14406 Total Cash Inflows from the Project - I 1092876 Total Initial Cash Out flow - II 1530000 NPV ( I - II) (437,124) Calculation of IRR of the Project IRR is the at which rate of interest the total cash inflows are equal to the cash out flow in the beginning. Here the NPV is the negative at the 18 % interest rate so for calcuation of IRR we reduce the interest rate to 10% and compute the NPV Particulars Cash Inflow Per Year PV Factor @ 10 % PV of cash Inflow Yearly Cash Inflows 225000 6.8137 1533082.5 (total 12 years) Solvage value of asset at 12 th year 105000 0.3186 33453 Total Cash Inflows 1,566,535.50 Total Cash Outflows 1,530,000.00 At 10% interest rate Cash inflows are equal to cash outflows IRR of the project is 10%
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