Expenses are expected to be 30% of revenues, and working capital required in eac
ID: 2763833 • Letter: E
Question
Expenses are expected to be 30% of revenues, and working capital required in each year is expected to be 10% of revenues in the following year. The product requires an immediate investment of $81,000 in plant and equipment.
b.
If the plant and equipment are depreciated over 4 years to a salvage value of zero using straight-line depreciation, and the firm’s tax rate is 20%, what are the project cash flows in each year? Assume the plant and equipment are worthless at the end of 4 years. (Do not round intermediate calculations.)
If the opportunity cost of capital is 10%, what is the project's NPV? (A negative value should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.)
What is project IRR? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)
Explanation / Answer
IRR is the rate of return for which NPV = 0
Time line 0 1 2 3 4 Cost of new machine -81000 Increase in working capital -6000 -4000 -3000 -1000 0 =Initial Investment outlay -87000 Profit= Sales - operating cost 42000 28000 21000 7000 -Depreciation Cost of new machine/4 -20250 -20250 -20250 -20250 0 =Salvage book value =Pretax cash flows 21750 7750 750 -13250 -taxes =(Pretax cash flows)*(1-tax) 17400 6200 600 -10600 +Depreciation 20250 20250 20250 20250 =after tax operating cash flow 37650 26450 20850 9650 Reversal of NWC 14000 +selling price*(1-tax rate) 0 +Salvage BV*tax rate 0 =after tax non operating CF 14000 Total Cash flow for the period -87000 37650 26450 20850 23650 Discount rate= 10.00% Discount factor= (1+ required rate)^N 1 1.1 1.21 1.331 1.4641 Discounted cash flow= total cash flow/discount factor -87000 34227.27 21859.5 15664.91 16153.27 NPV= Sum of discounted cash flow = 904.96Related Questions
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