Question

QUESTION 14 The following table presents the initial cash outlay and cash flow projections for a new line of digital cameras that DigiCam is evaluating: Year Cash inflow / outflow Amount of cash flow 0 Initial cash outlay for buying plant and equipment (at the beginning of Year 1) $2,350,000 1 Net operating pretax cash inflows $1,000,000 2 Net operating pretax cash inflows $1,200,000 3 Net operating pretax cash inflows $1,300,000 3 Salvage value (at the end of Year 3) $250,000 The company uses a discount rate of 10% for evaluating capital projects. The corporate tax rate is 30%. Assume that DigiCam will depreciate the plant and equipment over three years on a straight-line basis using $250,000 as the estimated salvage value. Also assume that the initial cash outlay occurs at the beginning of year 1 and all other cash flows occur at the end of the respective years.

Required:

a) Calculate the NPV of the project

b) Calculate the Payback period for the project

c) Calculate the IRR of the project (Hint: IRR lies between 18 and 20%)

Use the following present value table to solve this problem:

Periods	2%	4%	6%	8%	10%	12%	14%	16%	18%	20%
1	0.980	0.962	0.943	0.926	0.909	0.893	0.877	0.862	0.847	0.833
2	0.961	0.925	0.890	0.857	0.826	0.797	0.769	0.743	0.718	0.694
3	0.942	0.889	0.840	0.794	0.751	0.712	0.675	0.641	0.609	0.579
4	0.924	0.855	0.792	0.735	0.683	0.636	0.592	0.552	0.516	0.482
5	0.906	0.822	0.747	0.681	0.621	0.567	0.519	0.476	0.437	0.402

Answer 1