Question

Stark Industries is looking at investing in a new project that has an estimated life of 5 years. Start up costs will be $25,000. Stark Industries will also be investing $100,000 in new equipment. In the first year of operations, Stark anticipates sales revenues of $60,000. These revenues are expected to grow by 5% each year until year 4. The revenues are expected to decline by 5% in the 5^th year. First year operating costs will be $10,000, and in subsequent years are expected to grow in proportion to sale revenues. The applicable tax rate here is 34%. At the end of the project’s life, there will be no salvage. Your cost of capital is 12%, and the CCA rate is 25%.

Required:

1. Calculate the payback period
2. Calculate the discounted payback period
3. Calculate the Internal Rate of Return
4. Calculate the NPV
5. Calculate the NPV if the salvage is $10,000 at the end of the project’s life

Show all calculations to support your answer.

Answer 1

Formulas Used

PayBack Period =3+(125000-SUM(E9:G9))/H9

Discounted Payback Period =4+(125000-SUM(E10:H10))/I10

Internal Rate of Return=IRR(D9:I9)

Net Present Value =SUM(D9,E10:I10)

Net Present Value if Salvage value is Given=D15+I11

Discounted Salvage Value=10000/1.12^5

Discounted Cashflow=E9/1.12^E2

Depriciation (t=0)=100000*12.5%

Depriciation (t=1)=(100000-E5)*0.25

Depriciation (t=2,3,4,5)=F5*0.75