Frank Smith Plumbing Data Needed for analysis: Project Year-1 Year-2 Year-3 Year
ID: 2763909 • Letter: F
Question
Frank Smith Plumbing Data Needed for analysis:
Project Year-1 Year-2 Year-3 Year-4 Year-5 Year-6 Year-7 Year-8
Cost of Capital (borrowing) 12.00%
Cost of Truck $200,000
Cost of additional equiment attached to truck $15,000
Tax rate 35%
Annual Before Tax & Depreciation Truck Projected Earnings
YR 1 $70,000 YR 2$70,000 YR 3 $65,000 YR 4 $60,000 YR 5 $55,000 YR 6 $50,000 YR 7 $40,000 YR 8 $30,000
Depreciation Percentage Rate (MACRS)* YR 1 20.0% YR 2 32.0% YR 3 19.2% YR 411.5% YR 5 11.5% YR 6 5.8% YR 7 0.0% YR 8 0.0% *
The proposed truck has an estimated economic life of seven years but will be treated as a five-year MACRS property for depreciation purposes. Calculate the following -- light yellow highlighted cells need to be completed
Year-0 Year-1 Year-2 Year-3 Year-4 Year-5 Year-6 Year-7 Year-8
Annual Before Tax & Depreciation
Truck Projected Earnings
Depreciation Expense
Annual Before Tax Truck Projected Earnings
Tax Annual Projected Truck Earnings
Depreciation to add back
Projected Truck Net Cash Flow
Decision Criteria:
Pay Back Period Years
Discounted Pay Back Period (DPB)** Years
Net Present Value
Internal Rate of Return
Profitability Index
Discounted Cash Flow Needed for DPB Calc.
Recommendations
Explanation / Answer
Frank Smith Plumbing Details Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 MACRS rate 20.00% 32.00% 19.20% 11.50% 11.50% 5.80% Investment in Truck (215,000) Annual projected earninf before tax & depreciation 70,000 70,000 65,000 60,000 55,000 50,000 40,000 30,000 Depreciation (43,000) (68,800) (41,280) (24,725) (24,725) (12,470) - - Annual Before Tax Income 27,000 1,200 23,720 35,275 30,275 37,530 40,000 30,000 Tax @35% 9,450 420 8,302 12,346 10,596 13,136 14,000 10,500 Post Tax projected Earning 17,550 780 15,418 22,929 19,679 24,395 26,000 19,500 Add Back Depreciation 43,000 68,800 41,280 24,725 24,725 12,470 - - Net Cash flow 60,550 69,580 56,698 47,654 44,404 36,865 26,000 19,500 PV factor @ 12% 1 0.893 0.797 0.712 0.636 0.567 0.507 0.452 0.404 PV of Cash flows (215,000) 54,063 55,469 40,357 30,285 25,196 18,677 11,761 7,876 Pay Back Period in years= 3.59 Discounted Pay back period in years= 5.52 NPV = $ 28,681.97 PI Index PV of Cash inflows= 243,681.97 PV of investment= 215,000.00 PI= PV of Cash inflows/PV of investment= 1.13 IRR = 16.51% IRR Calculation Details Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 MACRS rate 20.00% 32.00% 19.20% 11.50% 11.50% 5.80% Investment in Truck (215,000) Annual projected earninf before tax & depreciation 70,000 70,000 65,000 60,000 55,000 50,000 40,000 30,000 Depreciation (43,000) (68,800) (41,280) (24,725) (24,725) (12,470) - - Annual Before Tax Income 27,000 1,200 23,720 35,275 30,275 37,530 40,000 30,000 Tax @35% 9,450 420 8,302 12,346 10,596 13,136 14,000 10,500 Post Tax projected Earning 17,550 780 15,418 22,929 19,679 24,395 26,000 19,500 Add Back Depreciation 43,000 68,800 41,280 24,725 24,725 12,470 - - Net Cash flow 60,550 69,580 56,698 47,654 44,404 36,865 26,000 19,500 PV factor @ 12% 1 0.858 0.737 0.632 0.543 0.466 0.400 0.343 0.295 PV of Cash flows (215,000) 51,970 51,258 35,849 25,861 20,683 14,738 8,921 5,743 NPV = $ 21.82 So at required rate of return 16.51% the NPV is close to 0, So The IRR is close to 16.51%
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