ABZ corporation\'s new project call for an investment of $100,000. it has an est

Question

ABZ corporation's new project call for an investment of $100,000. it has an estimated life of 10 years. the IRR has been calculated to be 15 percent. if cash flows are evenly distributed and tax is 40 percent what is the annual before tax cash flow each year. and you are helping a manufacturing firm deceide whether it should invest in anew plant the initial investment is expected to be $50 million, and the plant is expected to generate after-tax cash flows of $50 million, a year for the next 20 years. there will be an additional investment of $20 million needed to upgraded the plant in 10 years. if the discount rate is 10% i) Estimate the Net present value of the project ii) should this project be accepted or rejected/ Explain your answer? iii) Estimate the Internal rate of return for this Project

Explanation / Answer

ABZ corp's Numerical solution:

X = after-tax cash flow.

Y = before-tax cash flow.

X = Y(1 - T).

   $100,000 = X[(1/0.15)-(1/(0.15*(1+0.15)10)]

   $100,000 = X(5.0188)

X = $19,925.0

$19,925.0 = Y(1 - 0.40)

So the annual before tax cash flow is Y = $33,208.3

The solution of second manufacturing firm question :

i). NPV = -50 + 5 (PVA, 10%, 20 years) - 20/1.110 = -$15.14

ii). Since the NPV is -$15.14, i.e negative and the project would result in decrease in value for the firm, So the project should be rejected.

iii). The IRR is about 5%. The fact that there are two sign changes may lead to two IRRS

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

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