Question

1. The following I/S is based on the information associated with a new project. if The required return is 15%. Answer the questions.

		Year
	1	2	3	4
Sales Variable Cost Fixed Cost Depreciation EBIT Taxes (40%) Net income	6,000,000 3,000,000 1,500,000 300,000 1,200,000 480,000 720,000	6,000,000 3,000,000 1,500,000 300,000    1,200,000 480,000 720,000	6,000,000 3,000,000 1,500,000 300,000 1,200,000 480,000 720,000	6,000,000 3,000,000 1,500,000 300,000 1,200,000 480,000 720,000
	1. The following I/S is based on the information associated with a new project. if The required return is 15%. Answer the questions. Projected Income Statements Year 1 2 3 4 Sales Variable Cost Fixed Cost Depreciation EBIT Taxes (40%) Net income 6,000,000 3,000,000 1,500,000 300,000 1,200,000 480,000 720,000 6,000,000 3,000,000 1,500,000 300,000    1,200,000 480,000 720,000 6,000,000 3,000,000 1,500,000 300,000 1,200,000 480,000 720,000 6,000,000 3,000,000 1,500,000 300,000 1,200,000 480,000 720,000 We have to invest $1,500,000 to get started. In four years, the new equipment will be worth about tenth of what we paid for it. However, its book value is 300,000. Tax rate is 40%. In addition, we need additional NWC capital of $250,000 at the beginning of the life of this project. Fill the blanks in the following projected cash flow table. Projected Cash Flows Year 0 1 2 3 4 OCF Changes in NWC Capital spending ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) Total Cash Flow ( ) ( ) ( ) ( ) ( ) Figure out the net present value of this project. Based on the NPV, is the profitability index greater or less than 1? Figure out payback period, discounted payback period, IRR, and Modified IRR.

Answer 1

Projected income statement:

Particulars	1	2	3	4
Sales	6,000,000	6,000,000	6,000,000	6,000,000
- VC	3,000,000	3,000,000	3,000,000	3,000,000
Contribution	3,000,000	3,000,000	3,000,000	3,000,000
-FC	1,500,000	1,500,000	1,500,000	1,500,000
-Dep	300,000	300,000	300,000	300,000
EBIT	1,200,000	1,200,000	1,200,000	1,200,000
Tax@40%	480,000	480,000	480,000	480,000
Net income	720,000	720,000	720,000	720,000

Projected cash flows:

Particulars	0	1	2	3	4
OCF(depreciation added back)		1,020,000	1,020,000	1,020,000	1,020,000
Changes in NWC	(250,000)				250,000
Capital spending	(1,500,000)				(90,000)
Total cash flows	(1,750,000)	1,020,000	1,020,000	1,020,000	1,180,000

(The equipment is worth 150,000 but its book value is 300,000. Therefore it will get a tax benefit of 60,000 for the loss incurred)

NPV of the project (use NPV function in excel) = $1,090,051

PI is cash inflows/cash outflows = 1,859,051/1,750,000 = 1.06

IRR = 47% (using excel irr function)

MIRR requires reinvest rate which is not given. You can figure out the payback period with the calculations.