A firm is considering the following investment project. Theproject has a 5-year useful life with...

A firm is considering the following investment project. The project has a 5-year useful life with a $125000 salvage value as shown. Straight-line depreciation will be used. Assume the income tax rate of 34%. What is the after-tax rate of return on this capital expenditure?

Before Tax Cash Flow (thousands) Year S1000 500 340 244 200 200 125 (salvage value)

Solutions

Expert Solution

Rate of return is the discount rate at which Net Present Value (NPV) is 0.

Following spreadsheet is used to prepare the income statement and cash flow statement and determine the rate of return.

Rate of return is determined by Goal seek in Excel as shown below. Set: NPV To value 0 By changing cell: rate of return

FORMULA screen shot

ANSWER: Rate of return = 13.4 %

keosha answered 1 year ago

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