Question

1) Garrett Inc WACC is 10%

Garrett inc is considering a project that will cost the company $1M. the project will provide after tax cash flows for the next 5 years :

Y1: $0

Y2: $400,000

Y3: $500,000

Y4: $300,000

Y5: $200,000

A) what is the IRR for Garrett’s project?

B) what is the payback for the Garrett project?

2) what is the terminal value of the following asset:

cost: $1,000,000

accumulated depreciation: $750,000

projected scrap value: $300,000

company tax rate: 40%

Answer 1

Year	CashFlow	PV Factor	PV of cashflow	Cumulative Cashflow
0	$ -1,000,000	1	$ -1,000,000
1	$                -	0.909090909	$                -	$               -
2	$      400,000	0.826446281	$     330,579	$    330,579
3	$      500,000	0.751314801	$     375,657	$    706,236
4	$      300,000	0.683013455	$     204,904	$    911,140
5	$      200,000	0.620921323	$     124,184	$ 1,035,324
IRR			1.12%
Payback			4.72

Year	CashFlow	PV Factor	PV of cashflow	Cumulative Cashflow
0	-1000000	=1/(1+10%)^B3	=C3*D3
1	0	=1/(1+10%)^B4	=C4*D4	=E4
2	400000	=1/(1+10%)^B5	=C5*D5	=F4+E5
3	500000	=1/(1+10%)^B6	=C6*D6	=F5+E6
4	300000	=1/(1+10%)^B7	=C7*D7	=F6+E7
5	200000	=1/(1+10%)^B8	=C8*D8	=F7+E8
IRR			=IRR(E3:E8)
Payback			=4+(1000000-911140)/124184