Question

Crazy Cliff’s Car Coral crushes competition causing college customers considerable consternation. Crazy Cliff’s has no debt and considering opening a new dealership – Crazier Cliff’s. Crazy Cliff requires that all new projects have a return on equity of 18%. The new dealership is expected to increase net income by $200,000 per year over the projects 10-year life. The new dealership will be placed on land Crazy Cliff purchased for $400,000 2 years ago; the land could be sold today for $450,000. Crazy Cliff plans on operating the dealership out of a brand-new double-wide that can be purchased for $80,000 and will be depreciated to zero over 10 years. The double-wide has no salvage value and the land is expected to be sold for $500,000. Assume a tax rate of 25%. What are the IRR and payback period of the project? Should the project be accepted?

Answer 1

Note : Tax impact has been considered on sale of land as well in the solution. Depending on your assumption you may exclude this.

Below is the detailed solution.

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IRR = 29.407%

Payback period = 3.43 years.

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