\"A firm is considering purchasing a computer system. -Cost of system is $148,00
ID: 2790621 • Letter: #
Question
"A firm is considering purchasing a computer system. -Cost of system is $148,000. The firm will pay for the computer system in year 0.
-Project life: 4 years -Salvage value in year 0 (constant) dollars: $20,000
-Depreciation method: five-years MACRS
-Marginal income-tax rate = 42% (remains constant over time)
-Annual revenue = $155,000 (year-0 constant dollars)
-Annual expenses (not including depreciation) = $95,000 (year-0 constant dollars)
-The general inflation rate is 3.9% during the project period (which will affect all revenues, expenses, and the salvage value but not depreciation).
-The firm borrows the entire $148,000 at 9.7% interest to be repaid in 2 annual payments. The debt interest paid and the principal payment SHOULD NOT be changed by the inflation rate. Lending agencies set the interest rate of borrowing to account for the inflation rate. Calculate the effects of borrowing and include the debt interest paid and the principal repayment into the income statement and cash flow statement. Determine the INFLATION-FREE IRR' of the computer system. Enter your answer as a percentage between 0 and 100."
Selected Answer: Incorrect 16
Correct Answer: Correct 40.61137746
Answer range +/- 0.7 (39.91137746 - 41.31137746)
Explanation / Answer
Inputs Initial Investments ($ Thousands) - 30% -15% Purchase Cost 1,48,000 Salvage Value( $ Thousands) 20,000 Loan 1,48,000 Initial Revenue ($ Thoisands) 1,55,000 Initial Fixed Costs ($ Thousands) 95,000 Initial Total Expenses ($ Thousands) - Inflation Rate (%) 3.6% Discount rate (%) Receivables (% of Sales) Inventory (% of Next years's costs) Tax Rate (%) 42.0% Working Capital A. Loan & Interest Loan 1,48,000 Repayment Interest Principal Repayment Loan 1,48,000 Rate of Interest 9.70% 9.70% Years 2 2 Monthly Mortgage Payment= =(148000*9.7%*(1+9.7%)^2)/((1+9.7%)^2-1) 84,933 Year: 0 1 2 3 4 Depreciation Cost Price 1,48,000 Rate of depn 20% 32% 19.20% 11.52% Depn 29,600 47,360 28,416 17,050 Residual Value 25,574 Tax Saving 10,741 B. Fixed Assets Investment in Fixed Assets - Loan on Fixed Assets (70,577) (77,423) Sales of Fixed Assets 36,316 Cash Flow From Fixed Assets - (70,577) (77,423) - 36,316 C. Operating Cash Flow Revenue 1,55,000 1,55,000 1,55,000 1,55,000 Fixed Expenses (Including Interest) 1,09,356 1,02,510 95,000 95,000 Depreciation 29,600 47,360 28,416 17,050 Pretax Profit 16,044 5,130 31,584 42,950 Tax 6,738 2,155 13,265 18,039 Profit After Tax 9,306 2,975 18,319 24,911 Operating Cash Flow 38,906 50,335 46,735 41,961 E. Project Evalution Total Project cash Flow - (31,671) (27,088) 46,735 78,276 F. Real Inflow - (30,571) (26,146) 45,111 75,556 G. IRR Discount Rate 40% 40% 0.714285714 0.510204082 0.36443149 0.260308205 Discount Rate 41% 42% 0.704225352 0.495933347 0.34924884 0.245949884 PV 40% (21,836) (13,340) 16,440 19,668 931 PV 41% (21,529) (12,967) 15,755 18,583 (158) IRR=40+931/(931+158)*(42-40) 41.71%
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