Kendall Corporation is considering a project that would require an initial inves
ID: 2458475 • Letter: K
Question
Kendall Corporation is considering a project that would require an initial investment of $892,500 and would have a useful life of 7 years. The annual net cash receipts would be $285,000. The salvage value of the assets used in the project would be $80,000. The company’s tax rate is 35%. For tax purposes, the entire initial investment without any reduction for salvage value will be depreciated over 7 years. The company uses a discount rate of 19%.
20.
Required information
Compute the net present value of the project by inputting the variables that are entered into your calculator / Excel. (If a variable is not used in the calculation, input a zero (0). Omit the "$" and "%" signs in your response.) Round answers to the nearest dollar and use a minus sign ( - ) for negative numbers.
Excel / calculator input:
Compute the internal rate of return of the project by inputting the variables that are entered into your calculator / Excel. (If a variable is not used in the calculation, input a zero (0). Omit the "$" and "%" signs in your response.) Round answers to the nearest dollar / whole number and use a minus sign (-) for negative numbers.
Excel / calculator input:
Compute the net present value of the project by inputting the variables that are entered into your calculator / Excel. (If a variable is not used in the calculation, input a zero (0). Omit the "$" and "%" signs in your response.) Round answers to the nearest dollar and use a minus sign ( - ) for negative numbers.
Explanation / Answer
Kendall Corporation Assuming net cash flow given = Net after tax profit plus depreciation added back Salvage Value 80,000 Tax rate 35% Post Tax salvage value 52,000 ( The NPV result may vary to the result given to you due to different discount factor digits used. 4 digit factor used here for accuracy) Details Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Initial Investment (892,500) Net Cash Receipts 285,000 285,000 285,000 285,000 285,000 285,000 285,000 Post Tax salvage 52,000 Total Cash flows (892,500) 285,000 285,000 285,000 285,000 285,000 285,000 337,000 Discount factor@19% 1 0.8403 0.7062 0.5934 0.4987 0.4190 0.3521 0.2959 PV of Cash flows (892,500) 239,496 201,257 169,124 142,121 119,429 100,361 99,724 NPV = $ 179,010.85 Details Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Initial Investment (892,500) Net Cash Receipts 285,000 285,000 285,000 285,000 285,000 285,000 285,000 Post Tax salvage 52,000 Total Cash flows (892,500) 285,000 285,000 285,000 285,000 285,000 285,000 337,000 Discount factor@25.846% 1 0.7946 0.6314 0.5017 0.3987 0.3168 0.2517 0.2000 PV of Cash flows (892,500) 226,467 179,956 142,997 113,628 90,292 71,748 67,415 NPV = $ 2.6 So at required return rate 25.846% , the NPV is close to 0. So IRR is 25.846%
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