Question

You have been asked by the CFO of your company to evaluate the proposed expansion project. You collected the following data: Investment outlays: $200,000 ($25,000 for nondepreciable land, $175,000 for equipment) Life of the project: 5 years Depreciation for equipment: Your firm uses an accelerated depreciation method, and the equipment is MACRS (modified accelerated cost recovery system) 3-year property with depreciation rates of 33.33% in Year 1, 44.45% in Year 2, 14.81% in Year 3, and 7.41% in Year 4. Investment in net working capital: $30,000 (= $50,000 in current assets - $20,000 in current liabilities) Annual sales: $220,000 Annual cash operating expenses: $90,000 Income tax rate: 40% At the end of year five, the company will sell off the fixed capital assets for $50,000. At the end of year five, the firm will recover the net working capital investment of $30,000.

What is the total initial investment outlay?

1) $30,000 2) $50,000 3) $200,000 4) $230,000 5) $250,000

What is the depreciation amount in each year?

1) $58,328 in Year 1; $77,788 in Year 2; $25,918 in Year 3; $12,968 in Year 4; 0 in Year 5 2) 0 in Year 1; $58,328 in Year 2; $77,788 in Year 3; $25,918 in Year 4; $12,968 in Year 5 3) $25,918 in Year 1; $77,788 in Year 2; $58,328 in Year 3; $12,968 in Year 4; 0 in Year 5 4) $58,328 in Year 1; $77,788 in Year 2; $45,918 in Year 3; $12,968 in Year 4; $1,000 in Year 5 5) $48,328 in Year 1; $67,788 in Year 2; $35,918 in Year 3; $12,968 in Year 4; $500 in Year 5

What is the total after-tax cash flow in each year?

1) $58,328 in Year 1; $77,788 in Year 2; $25,918 in Year 3; $12,968 in Year 4; $500 in Year 5 2) $101,331 in Year 1; $109,115 in Year 2; $98,367 in Year 3; $93,187 in Year 4; $78,000 in Year 5 3) $43,004 in Year 1; $31,328 in Year 2; $62,450 in Year 3; $70,220 in Year 4; $78,000 in Year 5 4) $71,673 in Year 1; $52,213 in Year 2; $104,083 in Year 3; $117,033 in Year 4; $130,000 in Year 5 5) $101,331 in Year 1; $109,115 in Year 2; $88,367 in Year 3; $83,187 in Year 4; $148,000 in Year 5

What is the modified internal rate of return (MIRR) for the project if the cost of capital is 10%? Would you accept the project under the MIRR rule?

1) Accept the project since the MIRR is 22.71% 2) Accept the project since the MIRR is 15.94% 3) Accept the project since the MIRR is 12.49% 4) Reject the project since the MIRR is 9.53% 5) Reject the project since the MIRR is 9.35%

Answer 1

What is the total initial investment outlay? (4) $230,000

What is the depreciation amount in each year?

(1) $58,328 in Year 1; $77,788 in Year 2; $25,918 in Year 3; $12,968 in Year 4; 0 in Year 5

What is the total after-tax cash flow in each year?

5) $101,331 in Year 1; $109,115 in Year 2; $88,367 in Year 3; $83,187 in Year 4; $148,000 in Year 5

What is the modified internal rate of return (MIRR) for the project if the cost of capital is 10%? Would you accept the project under the MIRR rule?

(1) Accept the project since the MIRR is 22.71%

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