Crazy Cliff’s Car Coral crushes competition causing college customers considerable consternation. Crazy Cliff’s has no debt...

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?

Solutions

Expert Solution

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.

Kindly give an upvote.

IRR = 29.407%

Payback period = 3.43 years.

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jeff jeffy answered 1 year ago

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