Annual cash flow from a new investment is projected to be: As the year 1 through

Question

Annual cash flow from a new investment is projected to be:

As the year 1 through 4 cash flows are realized it is anticipated that they will be invested in treasury bonds paying 14% annual interest and maturing at year 4. Calculate the Growth DCFROR on the investment, assuming a 42% income tax rate is relevant and that after-tax treasury bond interest will be reinvested each year in identical bonds.

Annual cash flow from a new investment is projected to be: As the year 1 through 4 cash flows are realized it is anticipated that they will be invested in treasury bonds paying 14% annual interest and maturing at year 4. Calculate the Growth DCFROR on the investment, assuming a 42% income tax rate is relevant and that after-tax treasury bond interest will be reinvested each year in identical bonds.

Explanation / Answer

Assumption : Depreciation is taken on SLM method and life is estimated at 4 years

Year 0 1 2 3 4 Cash Flow         (170,000)           65,000           75,000           85,000           95,000 Add: T Bill Interest              7,777              9,220           10,150 Depreciation @ SLM         (42,500)         (42,500)         (42,500)         (42,500) PBT           22,500           40,277           51,720           62,650 Tax @ 42%           (9,450)         (16,916)         (21,723)         (26,313) PAT           13,050           23,361           29,998           36,337 Add: Depreciation           42,500           42,500           42,500           42,500 Cash flow after tax           55,550           65,861           72,498           78,837 Tresury bond Interest              7,777              9,220           10,150           11,037

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