Skywards Inc., an airline caterer, is purchasing refrigerated trucks at a total

Question

Skywards Inc., an airline caterer, is purchasing refrigerated trucks at a total cost of $3.25 million. After-tax net income from this investment is expected to be $750,000 for the next five years. Annual depreciation expense was $650,000. The company’s cost of capital is 15 percent.

(my professor wants this on excel but I seem to be struggling on getting the formulas for the graphs correct) what excel formula do I use and how do I get the first number for each.

Compute the discounted payback for this project?

Compute the NPV for this project

Compute the IRR for this project

Explanation / Answer

Discounted Payback period 3.07 Years NPV $ 14,43,017 IRR 34.57% Workings: a. Calculation of Annual cash inflows After tax net income $       7,50,000 Annual depreciation $       6,50,000 Annual cash inflows $     14,00,000 b. Year Cash flows Discount factor @ 15% Present Value Cumulative Net Present value 0 $   -32,50,000               1.0000 $       -32,50,000 $ -32,50,000 1 $     14,00,000               0.8696 $         12,17,391 $ -20,32,609 2 $     14,00,000               0.7561 $         10,58,601 $   -9,74,008 3 $     14,00,000               0.6575 $           9,20,523 $       -53,485 4 $     14,00,000               0.5718 $           8,00,455 $     7,46,970 5 $     14,00,000               0.4972 $           6,96,047 $   14,43,017 Net Present Value $         14,43,017 Payback period is the time upto which initila cost is recovered back. Payback is of two types -(a) Payback Period and (b) Discounted Payback Period The difference between payback and discounted payback is that discounted payback covers time value of money whereas payback does not. Discounted Payback period = 3+(53485/800455) =           3.07 Years c. Calculation of IRR IRR is the rate at which Net Present value is zero. At 15%, NPV is $     14,43,017 Now let us calculate NPV at 40% Year Cash flows Discount factor Present Value 0 $   -32,50,000               1.0000 $       -32,50,000 1 $     14,00,000               0.7143 $         10,00,000 2 $     14,00,000               0.5102 $           7,14,286 3 $     14,00,000               0.3644 $           5,10,204 4 $     14,00,000               0.2603 $           3,64,431 5 $     14,00,000               0.1859 $           2,60,308 Net Present Value $          -4,00,771 IRR = 15%+(40%-15%)*(1443017/(1443017+400771)) = 34.57% Thus, Aproximate IRR 34.57%

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