Kendall Corporation is considering a project that requires an initial investment
ID: 2657294 • Letter: K
Question
Kendall Corporation is considering a project that requires an initial investment of $577,500 and has a useful life of 11 years. The annual net cash receipts will be $190,000. The salvage value of the assets used in the project will be $70,000. The company's tax rate is 25%. For tax purposes, the entire initial investment (without any reduction for salvage value) will be depreciated over 11 years. The company uses a discount rate of 19%. Provide the variables you entered into Excel and your final calculation of net present value after-tax. (If a variable i not used in the calculation, input a zero (0). Omit the "S" and "%" signs in your response. Round answers to the nearest dollar and use a minus sign () for negative numbers.) Excel input: Rate er PMT PV FV Net present value Required Compute the internal rate of return after-tax. Provide the variables you entered into Excel for the calculation. (If a variable is not used in the calculation, input a zero (0). Omit the "S" and "%" signs in your response. Round answers to the nearest dollar / whole number and use a minus sign (-) for negative numbers.)Explanation / Answer
Solution:
Calculation of yearly Cash Inflow:
Annual Depreciation = $52,500 ($577,500/11)
Annual after-tax Cash Inflow
A
B
C
1
Annual Inflow
150,000
2
Less: depreciation
52,500
3
97,500 (C1 - C2)
4
Less: Tax @ 25%
24,375 (C3 * 25%)
5
After tax income
73,125 (C3 – C4)
6
Add: Depreciation
52,500
7
Net Cash Inflow
125,625 (C5 + C6)
Calculation of NPV:
A
B
C
10
19%
Annual Discount Rate
11
-577,500
Initial Investment
12
125,625
Cash Inflow 1
13
125,625
Cash Inflow 2
14
125,625
Cash Inflow 3
15
125,625
Cash Inflow 4
16
125,625
Cash Inflow 5
17
125,625
Cash Inflow 6
18
125,625
Cash Inflow 7
19
125,625
Cash Inflow 8
20
125,625
Cash Inflow 9
21
125,625
Cash Inflow 10
22
181,875
Cash Inflow 11
23
-5,582.92
NPV [=NPV(B10,B12:B22)+B11]
Rate = 19%
Nper = 11
PMT = $125,625
PV = $577,500
FV = $0
Net Present Value = -$5582.92
Calculation of IRR:
A
B
C
26
-577,500
Initial Investment
27
125,625
Cash Inflow 1
28
125,625
Cash Inflow 2
29
125,625
Cash Inflow 3
30
125,625
Cash Inflow 4
31
125,625
Cash Inflow 5
32
125,625
Cash Inflow 6
33
125,625
Cash Inflow 7
34
125,625
Cash Inflow 8
35
125,625
Cash Inflow 9
36
125,625
Cash Inflow 10
37
181,875
Cash Inflow 11
38
19%
IRR [=IRR(B26:B37)]
Rate = 0%
Nper = 11
PMT = $125,625
PV = $577,500
FV = $0
Internal Rate of Return (IRR) = 19%
A
B
C
1
Annual Inflow
150,000
2
Less: depreciation
52,500
3
97,500 (C1 - C2)
4
Less: Tax @ 25%
24,375 (C3 * 25%)
5
After tax income
73,125 (C3 – C4)
6
Add: Depreciation
52,500
7
Net Cash Inflow
125,625 (C5 + C6)
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