Allouez Corp. is thinking of investing in a project that will require an initial

Question

Allouez Corp. is thinking of investing in a project that will require an initial investment of $2,000,000. The investment will be fully depreciated using 5-year MACRS (use 20%, 32%, 19%, 12%, 12% and 5%). The project will provide annual revenues of $1,200,000 and annual operating costs (excluding depreciation) of $500,000. The project will generate cash flows for six (6) years. At the end of the sixth year, the company plans to abandon the project. There is no anticipated terminal cash flow. The company uses a 10% discount rate when analyzing capital projects. The projected tax rate is 30%. The CEO of the company has limited knowledge of capital budgeting and has asked you to do a quick analysis of the proposed project.

1. Prepare a depreciation schedule for the investment. (My Answer is below)

2. Calculate the net operating cash flows for each of the 6 years of the project's life (My answer is below)

870000

This is where I question myself, I am not sure if my understanding of how to calculate the initial investment is correct; the Initial investment= $2,000,000+($500,000*6)=$3,000,000

3. Calculate the investment's net present value (my answer is below based on my initial investment calculation)

=960000(1.10)-1+1032000(1.10)-2+954000(1.10)-3+912000(1.10)-4+912000(1.10)-5+870000(1.10)-6-3000000=$1122654

4. Calculate the investment's discounted payback period

I got 3.90 years

5. Calculate the investment's MIRR

=960000(1.10)5+1032000(1.10)4+954000(1.10)3+912000(1.10)2+912000(1.10)1+870000(1.10)0=$7303535

7303535=3000000(1+MIRR)^6

Year Percentage Depreciation Ending Balance 1 20 $400,000 $1,600,000 2 32 $640,000 $960,000 3 19 $380,000 $580,000 4 12 $240,000 $340,000 5 12 $240,000 $100,000 6 5 $100,000 $0

Explanation / Answer

1. Prepare a depreciation schedule for the investment. (My Answer is below)

2. Calculate the net operating cash flows for each of the 6 years of the project's life (My answer is below)

=520000

The Initial investment= $2,000,000 (The $500000 expenditure for yearly deduction from revenue as in above table)

3. Calculate the investment's net present value (my answer is below based on my initial investment calculation)

=610000(1.10)-1+682000(1.10)-2+604000(1.10)-3+562000(1.10)-4+562000(1.10)-5+520000(1.10)-6 -2000000= $597554

4. Calculate the investment's discounted payback period

610000(1.10)-1+682000(1.10)-2+604000(1.10)-3+562000(1.10)-4+562000(1.10)-5+520000

Discounted Payback period = 4.13 years

5. Calculate the investment's MIRR

=610000(1.10)5+682000(1.10)4+604000(1.10)3+562000(1.10)2+562000(1.10)1+520000(1.10)0=$4003302

MIRR = (4003302 / 2000000)1/6 - 1 = 1.1491 - 1 = 0.1491 OR 14.91%

ear Percentage Depreciation Ending Balance 1 20 $400,000 $1,600,000 2 32 $640,000 $960,000 3 19 $380,000 $580,000 4 12 $240,000 $340,000 5 12 $240,000 $100,000 6 5 $100,000 $0

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