2. Deep Waters, Inc. is using the internal rate of return (IRR) when evaluating
ID: 2718165 • Letter: 2
Question
2.
Deep Waters, Inc. is using the internal rate of return (IRR) when evaluating projects. Find the IRR for the company’s project. The initial outlay for the project is $468,900. The project will produce the following after-tax cash inflows of
Year 1: 176,300
Year 2: 100,000
Year 3: 128,300
Year 4: 123,700
Round the answer to two decimal places in percentage form. (Write the percentage sign in the "units" box)
You should use Excel or financial calculator.
3.
Great Seneca Inc. sells $100 million worth of 27-year to maturity 10.81% annual coupon bonds. The net proceeds (proceeds after flotation costs) are $975 for each $1,000 bond. The firm's marginal tax rate is 40%. What is the after-tax cost of capital for this debt financing?
Round the answer to two decimal places in percentage form. (Write the percentage sign in the "units" box)
You should use Excel or financial calculator.
Your Answer:
4.
Tall Trees, Inc. is using the net present value (NPV) when evaluating projects. You have to find the NPV for the company’s project, assuming the company’s cost of capital is 8.93 percent. The initial outlay for the project is $452,077. The project will produce the following after-tax cash inflows of
Year 1: 122,575
Year 2: 72,326
Year 3: 184,923
Year 4: 195,164
Round the answer to two decimal places.
Your Answer:
5.
Gold Mining, Inc. is using the profitability index (PI) when evaluating projects. Gold Mining’s cost of capital is 6.46 percent. What is the PI of a project if the initial costs are $2,072,340 and the project life is estimated as 5 years? The project will produce the same after-tax cash inflows of $662,495 per year at the end of the year.
Round the answer to two decimal places.
Your Answer:
Explanation / Answer
Q. 4. Calculation of NPV = P.V. of cash inflow - P.V. of cash outflow
= 455119.18(NOTE 1) - 452077
= $ 3042.18 (approx) i.e., $ 3042 (Rounded off)
(NOTE 1) P.V. of Cash inflow:-
Q. 5. Profitability Index = P.V. of cash inflow / P.V. of cash ouflow
= 2755979 / 2072340
= 1.33 (approx)
(NOTE 2):- P.V. of Cash inflow
= 662495 * 4.160 (Cumulative P.V. factor @ 6.46% for 5 Years)
= $ 2755979
Q. 2. Calculation of IRR :-
At 5 %, we calculate P. V. of Cash inflow:-
At 10%, we calculate P.V. of Cash inflow:-
IRR = 5 + (10 - 5) * (471194 - 468900) / (471194 - 423697) * [ By using interpolation]
= 5 + 5 * 2294 / 47497
= 5 + 11470 / 47497
= 5 + 0.24 = 5.24 %
Q. 3. The after-tax cost of capital for debt financing (Kd) =
Interest (1 - t) + ( Redemption value - Net proceeds) / maturity period * 100
(Redemption value + Net proceeds) / 2
= 1000 * 10.81% * ( 1 - 0.40) + ( 1000 - 975) / 27 * 100
(1000 + 975) / 2
= 64.86 + 0.926 / 987.5
= 65.786 * 100 / 987.5
= 6.66 %
Year Cash inflow PV Factor @ 8.93% P.V. of Cash inflow 1 122575 0.918 112523.85 2 72326 0.842 60898.492 3 184923 0.774 143130.402 4 195164 0.710 138566.44 455119.18 (approx)Related Questions
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