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)

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 2 years ago

A firm is considering a project with a 5-year life and an initial cost of $1,000,000....

A firm is considering a project with a 5-year life and an initial cost of $1,000,000. The discount rate for the project is 10%. The firm expects to sell 2,500 units a year for the first 3 years. The after-tax cash flow per unit is $120. Beyond year 3, there is a 50% chance that sales will fall to 900 units a year for both years 4 and 5, and a 50% chance that sales will rise to 3,000 units...

Company XYZ is considering an investment of $100,000. The useful life of the project is 10...

Company XYZ is considering an investment of $100,000. The useful life of the project is 10 years. The cut off period is three (3) years. The board of the directors has identified two alternatives A and B. The expected annual cash flows are as follows: Cost of Cash Flow Alternative A Alternative B Initial Cost ($100,000) ($100,000) Cash Flow Year 1 35000 35000 Cash Flow Year 2 28000 35000 Cash Flow Year 3 32000 35000 Cash Flow Year 4 40000...

A firm is considering a project that requires an initial investment of $420,000. The life of...

A firm is considering a project that requires an initial investment of $420,000. The life of this project is five years. Cash flows for each year are estimated as follows: Year 1 Year 2 Year 3 Year 4 Year 5 $180,000 $220,000 $160,000 -$20,000 -$80,000 If the cost of capital of this project is 8%, what is the payback period of this project?

A firm is considering a project that requires an initial investment of $250,000. The life of...

A firm is considering a project that requires an initial investment of $250,000. The life of this project is five years. Cash flows for each year are estimated as follows: Year 1 Year 2 Year 3 Year 4 Year 5 $80,000 $120,000 $160,000 $40,000 -$90,000 The cost of capital of this project is 8%. Calculate the profitability index and make a decision.

A firm is considering a project that requires an initial investment of $180,000. The life of...

A firm is considering a project that requires an initial investment of $180,000. The life of this project is five years. Cash flows for each year are estimated as follows: Year 1 Year 2 Year 3 Year 4 Year 5 $105,000 $190,000 $50,000 -$60,000 -$110,000 The cost of capital of this project is 8%. Calculate the internal rate of return of the project and make a decision. Accept since the IRR is 5.04%, which is less than the required rate....

A company is considering a new project. The project costs $430,000 and has a 5-year life....

A company is considering a new project. The project costs $430,000 and has a 5-year life. During the Year 1, it will produce a cash flow of $114,000, which is expected to grow at 6.70% per annum from Year 2 to 5. The appropriate discount rate is 13.60% per annum. Please answer the following questions: (a) Work out the Year 2 to 5 cash flows from this investment (with no added terminal value) (1 mark). (b) Use a financial function...

A firm is considering an investment project with the following cash flows: Year 0 = -$110,000...

A firm is considering an investment project with the following cash flows: Year 0 = -$110,000 (initial costs); Year 1= $40,000; Year 2 =$90,000; and Year 3 = $30,000; and Year 4 = $60,000. The company has a 10% cost of capital. What is the project’s discounted payback? 1.67 years 1.86 years 1.99 years 2.08 years A firm is considering an investment project with the following cash flows: Year 0 = -$110,000 (initial costs); Year 1= $40,000; Year 2 =$90,000;...

You are considering an investment project. The project has a life of three years. Project Information:...

You are considering an investment project. The project has a life of three years. Project Information: Initial investment into a new machine, which would cost Rs.4,50,000. Machine is to be depreciated to zero over three years (straight line depreciation) with no salvage value at the end. Operating revenue is expected to be Rs. 6,00,000 per year. Operating costs for raw materials expected to be Rs.3,00,000 per year. Assume tax rate is 30% and the discount rate is 20%. a. Compute...

A company is considering an investment that will cost $743,000 and have a useful life of...

A company is considering an investment that will cost $743,000 and have a useful life of 8 years. The cash flows from the project are expected to be $410,000 per year in the first two years then $142,000 per year for the last 6 years. If the appropriate discount rate is 12.7 percent per annum, what is the NPV of this investment (to the nearest dollar)? Select one: a. $394283 b. $1880283 c. $384492 d. $516026

A company is considering an investment that will cost $744,000 and have a useful life of...

A company is considering an investment that will cost $744,000 and have a useful life of 8 years. The cash flows from the project are expected to be $512,000 per year in the first two years then $108,000 per year for the last 6 years. If the appropriate discount rate is 15.0 percent per annum, what is the NPV of this investment (to the nearest dollar)? Select one: a. $397417 b. $1885417 c. $415178 d. $497087

Question