a). Complete the spreadsheet below by estimating the project\'s annual after tax

Question

a). Complete the spreadsheet below by estimating the project's annual after tax cash flow. b). What is the investment's net present value at a discount rate of 10 percent? c). What is the investment's internal rate of return? d). How does the internal rate of return change if the discount rate equals 20 percent? e). How does the internal rate of return change if the growth rate in EBIT is 8 percent instead of 3 percent? Facts and Assumptions Equipment initial cost $ $   350,000 Depreciable life yrs.                 7 Expected life yrs.               10 Salvage value $ $0 Straight line depreciation EBIT in year 1         28,000 Tax rate 38% Growth rate in EBIT 3% Discount rate 10% Year 0 1 2 3 4 5 6 7 8 9 10 Initial cost       350,000 Annual depreciation    50,000    50,000    50,000    50,000    50,000    50,000    50,000 EBIT    28,000    28,840    29,705    30,596    31,514    32,460    33,433    34,436    35,470    36,534 a). Complete the spreadsheet below by estimating the project's annual after tax cash flow. b). What is the investment's net present value at a discount rate of 10 percent? c). What is the investment's internal rate of return? d). How does the internal rate of return change if the discount rate equals 20 percent? e). How does the internal rate of return change if the growth rate in EBIT is 8 percent instead of 3 percent?

Explanation / Answer

Discount rate 10% Year 0 1 2 3 4 5 6 7 8 9 10 Initial cost      - 350,000 Annual depreciation 50000 50000 50000 50000 50000 50000 50000 EBIT 28000 28840 29705.2 30596.36 31514.25 32459.67 33433.46 34436.47 35469.56 36533.65 Tax@38% 0 0 0 0 0 0 0 13085.68 13478.6 13882.92 The tax is 0 for beginning 7 years as the depretiation is greater than profit Post tax CF 28000 28840 29705.2 30596.36 31514.25 32459.67 33433.46 21350.79 21990.96 22650.73 PV@10% -350000 25454.55 23834.71 22317.96 20897.72 19567.87 18322.64 17156.65 9960.3 9326.315 8732.837 NPV -174428.45 IRR -12.72% Discount rate 20% Year 0 1 2 3 4 5 6 7 8 9 10 Initial cost      - 350,000 Annual depreciation 50000 50000 50000 50000 50000 50000 50000 EBIT 28000 28840 29705.2 30596.36 31514.25 32459.67 33433.46 34436.47 35469.56 36533.65 Tax@38% 0 0 0 0 0 0 0 13085.68 13478.6 13882.92 The tax is 0 for beginning 7 years as the depretiation is greater than profit Post tax CF 28000 28840 29705.2 30596.36 31514.25 32459.67 33433.46 21350.79 21990.96 22650.73 PV@10% -350000 23333.33 20027.78 17190.51 14755.19 12664.87 10870.68 9330.666 4965.511 4261.996 3658.219 NPV -228941.25 IRR #NUM! Highly negative EBIT@8% growth rate Discount rate 10% Year 0 1 2 3 4 5 6 7 8 9 10 Initial cost      - 350,000 Annual depreciation 50000 50000 50000 50000 50000 50000 50000 EBIT 28000 30240 32659.2 35271.94 38093.69 41141.19 44432.48 47987.08 51826.05 55972.13 Tax@38% 0 0 0 0 0 0 0 13085.68 13478.6 13882.92 The tax is 0 for beginning 7 years as the depretiation is greater than profit Post tax CF 28000 30240 32659.2 35271.94 38093.69 41141.19 44432.48 34901.4 38347.45 42089.21 PV@10% -350000 25454.55 24991.74 24537.34 24091.21 23653.18 23223.13 22800.89 16281.76 16263.06 16227.21 NPV -132475.94 IRR -8.42%

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