Question

Facts and Assumptions
Equipment initial cost $	$ 350,000
Depreciable life yrs.	7
Expected life yrs.	10
Salvage value $	$0
Straight line depreciation
EBIT in year 1	28,000
Tax rate	38%
Growth rate in EBIT	3%
Discount rate	10%
Year	0	1	2	3	4	5	6	7	8	9	10
Initial cost	350,000
Annual depreciation		50,000	50,000	50,000	50,000	50,000	50,000	50,000
EBIT		28,000	28,840	29,705	30,596	31,514	32,460	33,433	34,436	35,470	36,534

a. estimate the project's annual after tax cash flow

b. what is the NPV of the initial investment with a discount rate of 10%?

c. what is the internal rate of return?

d. how does the internal rate of return change if the discount rate is 20%?

e. how does the internal rate of return change if the growth rate in EBIT is 8% not 3%?

Answer 1