Question

1. Laketown Enterprises is considering a project that has the following cash flows. It’s WACC is 10%. Year 0, 1, 2, and 3 Cash flows are $950, $500, $400, and $300, respectively.

a. What is the project’s payback period?

b. What is the project’s NPV?

c. What is the project’s IRR?

d. What is the project’s discounted payback period?

2. Cole Trucking, the company you work for, is considering a new project whose data are shown below. What is the project's Year 1 cash flow? Sales revenues, each year $62,500 Depreciation $8,000 Other operating costs $25,000 Interest expense $8,000 Tax rate 35.0%

3. Chattanooga Enterprises is selling off some old equipment it no longer needs because its associated project has come to an end. The equipment originally cost $22,500, of which 75% has been depreciated. The firm can sell the used equipment today for $6,000, and its tax rate is 40%. What is the equipment's after-tax salvage value for use in a capital budgeting analysis? Note that if the equipment's final market value is less than its book value, the firm will receive a tax credit as a result of the sale.

4. Foxx Manufacturing is considering manufacturing a new style of shirt, whose data are shown below. The equipment to be used would be depreciated by the straight-line method over its 3-year life and would have a zero salvage value, and no new working capital would be required. Revenues and other operating costs are expected to be constant over the project's 3-year life. However, this project would compete with other Foxx's products and would reduce their pre-tax annual cash flows. What is the project's NPV? (Hint: Cash flows are constant in Years 1-3.) WACC 10.0% Pre-tax cash flow reduction for other products (cannibalization) $5,000 Investment cost (depreciable basis) $80,000 Straight-line deprec. rate 33.333% Sales revenues, each year for 3 years $67,500 Annual operating costs (excl. deprec.) $25,000 Tax rate 35.0%

Answer 1

Q1.
Payback period
Year	Casshflows	Cumulative CF
0	-950	-950
1	500	-450
2	400	-50
3	300	250
Payback period = 2 years + 50/300 = 2.17 yrs
NPV
Year	Casshflows	PVF at 10%	Present value
0	-950	1	-950
1	500	0.909091	454.5455
2	400	0.826446	330.5785
3	300	0.751315	225.3944
NPV			60.52
IRR;
Year	Casshflows	PVF at 14%	Present value
0	-950	1	-950
1	500	0.877193	438.5965
2	400	0.769468	307.787
3	300	0.674972	202.4915
NPV			-1.12
IRR			14%
Discounted Payback period
Year	Casshflows	PVF at 10%	PV of CF	Cumulative CF
0	-950	1	-950	-950
1	500	0.909091	454.5455	-495.455
2	400	0.826446	330.5785	-164.876
3	300	0.751315	225.3944	60.51841
Discounted Payback period = 2 yrs + 164.88/225.4 = 2.73 yrs