Chapter 7 Problem 12 a). Complete the spreadsheet below by estimating the projec

Question

Chapter 7 Problem 12

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

Net present value @ 10%

Internal rate of return

Explanation / Answer

Answer to Question A & B.) Year EBIT Depreciation Taxex Op. Cash Flow PV Factor@10% 0 -350000 0 0 -3,50,000 1 -350000 1 28000 50000 10640 67,360 0.909 61230 2 28840 50000 10959 67,881 0.826 56070 3 29705 50000 11288 68,417 0.751 51381 4 30596 50000 11626 68,970 0.683 47107 5 31514 50000 11975 69,539 0.621 43184 6 32460 50000 12335 70,125 0.565 39621 7 33434 50000 12705 70,729 0.514 36355 8 34437 50000 13086 71,351 0.467 33321 9 35470 50000 13479 71,991 0.425 30596 10 36534 50000 13883 72,651 0.386 28043 NPV 76908 Answer to Question C.) Internal Rate of Return for Operating Cash Flow 15% Answer to Question D) Year EBIT Depreciation Taxex Op. Cash Flow PV Factor@10% 0 -350000 0 0 -3,50,000 1 -350000 1 28000 50000 10640 67,360 0.833 56111 2 28840 50000 10959 67,881 0.694 47109 3 29705 50000 11288 68,417 0.578 39545 4 30596 50000 11626 68,970 0.482 33244 5 31514 50000 11975 69,539 0.402 27955 6 32460 50000 12335 70,125 0.335 23492 7 33434 50000 12705 70,729 0.279 19733 8 34437 50000 13086 71,351 0.233 16625 9 35470 50000 13479 71,991 0.194 13966 10 36534 50000 13883 72,651 0.162 11769 NPV -60451 Internal Rate of Return for Operating Cash Flow 15% Answer to Question E) Year EBIT Depreciation Taxex Op. Cash Flow PV Factor@10% 0 -350000 0 0 -3,50,000 1 -350000 1 28000 50000 10640 67,360 0.833 56111 2 30240 50000 11491 68,749 0.694 47712 3 32659 50000 12410 70,249 0.578 40604 4 35272 50000 13403 71,869 0.482 34641 5 38094 50000 14476 73,618 0.402 29594 6 41142 50000 15634 75,508 0.335 25295 7 44433 50000 16885 77,548 0.279 21636 8 47988 50000 18235 79,753 0.233 18582 9 51827 50000 19694 82,133 0.194 15934 10 55973 50000 21270 84,703 0.162 13722 NPV -46169 Internal Rate of Return for Operating Cash Flow 16%

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.