Question

In: Finance

It costs $53,000 to buy a food truck, which will produce the following incremental after-tax cash...

It costs $53,000 to buy a food truck, which will produce the following incremental after-tax cash inflows: Year 1, $25,000; Year 2, $20,000; Year 3, $20,000; Year 4, $25,000. Your discount rate is 10%. What is the discounted payback period?

  • A. 1.8 years
  • B. 2.4 years
  • C. 2.9 years
  • D. 3.6 years

Solutions

Expert Solution

Ans C. 2.9 years

Year Project Cash Flows (i) DF@ 10% DF@ 10% (ii) PV of Project A ( (i) * (ii) ) Cumulative Cash Flow
0 -53000 1 1                           (53,000.00)             (53,000.00)
1 25000 1/((1+10%)^1) 0.909                             22,727.27             (30,272.73)
2 20000 1/((1+10%)^2) 0.826                             16,528.93             (13,743.80)
3 20000 1/((1+10%)^3) 0.751                             15,026.30                  1,282.49
4 25000 1/((1+10%)^4) 0.683                             17,075.34                18,357.83
NPV                             18,357.83
Discounted Payback Period = 2 years + 13743.80/15026.30
2.9 years

Related Solutions

It costs $70,000 to buy a food truck, which will produce the following incremental after-tax cash...
It costs $70,000 to buy a food truck, which will produce the following incremental after-tax cash inflows: Year 1, $19,000; Year 2, $21,000; Year 3, $22,000; Year 4, $23,000. What is the payback period?
Which of the following is considered an incremental cash flow? a. All costs associated with the...
Which of the following is considered an incremental cash flow? a. All costs associated with the project that have been incurred prior to the time the analysis is being conducted. b. Interest on funds borrowed to help finance the project. c. The end-of-project recovery of any additional net operating working capital required to operate the project. d. Expenditures to date on research and development related to the project, provided those costs have already been expensed for tax purposes.
Worldwide trousers is considering an expansion of their existing business. The incremental after-tax cash flows to...
Worldwide trousers is considering an expansion of their existing business. The incremental after-tax cash flows to the project are: Year 0: $-25,500 Year 1: $5,500 Year 2: $7,500 Year 3: $8,500 Year 4: $10,000 The unlettered cost of equity is 10%. The corporate tax rate is 40%. A. Calculate the NPV of the project if it is all equity financed. B. Worldwide plans to issue a 4-year loan for $12,000 at an interest rate of 8% to partially finance the...
Which of the following cash flows is NOT an incremental cash flow associated with a project...
Which of the following cash flows is NOT an incremental cash flow associated with a project to dig a new gold mine? Select one: a. The cost of taking on new employees who will be hired to work on the mine site. b. The cost of land which will be purchased for the new mine. c. The cost of mining equipment which will be purchased for the new mine. d. The cost of an environmental impact study which has been...
Laura wants to buy a delivery truck. The truck costs $114,000 , and will allow her...
Laura wants to buy a delivery truck. The truck costs $114,000 , and will allow her to increase her after tax profits by $17,000 per year for the next 10 years. She will borrow 99% of the cost of the truck for 10 years, at an interest rate of 6%. Laura’s unlevered cost of capital is 15% and her tax rate is 22%. The loan includes a $2,000 application fee. What is the NPV of buying the truck on these...
Laura wants to buy a delivery truck. The truck costs $132,000 , and will allow her...
Laura wants to buy a delivery truck. The truck costs $132,000 , and will allow her to increase her after tax profits by $24,000 per year for the next 10 years. She will borrow 80% of the cost of the truck for 10 years, at an interest rate of 6%. Laura’s unlevered cost of capital is 17% and her tax rate is 34%. The loan includes a $1,000 application fee. What is the NPV of buying the truck on these...
A project will cost $50,000 today and produce equal after tax cash flows for the next...
A project will cost $50,000 today and produce equal after tax cash flows for the next seven years (these will be the only cash flows from the project). Your discount rate is 13%. If it turns out your payback period is four years, what is the net present value of this project?  
A project requires an initial investment of $300,000 and expects to produce an after-tax operating cash...
A project requires an initial investment of $300,000 and expects to produce an after-tax operating cash flow of $150,000 per year for three years. The asset value will be depreciated using straight-line depreciation over three years.At the end of the project, the asset could be sold for a price of $100,000. Assume a 21% tax rate and 15% cost of capital. Calculate the NPV of the project.
Which of the following is not considered a relevant concern in determining incremental cash flows for...
Which of the following is not considered a relevant concern in determining incremental cash flows for a new product? [CH-10] a. The final disposal of a product, including any tax effects related to the sale of the product. b. Revenues from the existing product that would be lost as a result of some customers switching to the new product. c. Shipping and installation costs associated with preparing the machine to be used to produce the new product. d. The cost...
Which one of the following would NOT result in incremental cash flows and thus should NOT...
Which one of the following would NOT result in incremental cash flows and thus should NOT be included in the capital budgeting analysis for a new product? A. Using some of the firm's high-quality factory floor space that is currently unused to produce the proposed new product. This space could be used for other products if it is not used for the project under consideration. B. Revenues from an existing product would be lost as a result of customers switching...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT