Question
In: Finance
The table below offers EBIT for a potential capital investment for Fake Company Alpha. You should...
The table below offers EBIT for a potential capital investment for Fake Company Alpha. You should be able to determine a few things once you consider the following:
- The initial investment is $12,000.
- Depreciation is straight line over four years.
- The company's WACC is estimated at 8.5%.
- Company analysts estimate that a proper salvage value at the end of the project life of four years is 30% of the initial investment.
- The company's tax rate is 27.0%.
| YEAR 1 | YEAR 2 | YEAR 3 | YEAR 4 | |
| EBIT | $(3,600) | $(2,725) | $1,875 | $5,000 |
What is this project's internal rate of return?
Solutions
Expert Solution
| Time line | 0 | 1 | 2 | 3 | 4 | |
| Cost of new machine | -12000 | |||||
| =Initial Investment outlay | -12000 | |||||
| EBIT= | -3600 | -2725 | 1875 | 5000 | ||
| -taxes | =(Pretax cash flows)*(1-tax) | -2628 | -1989.25 | 1368.75 | 3650 | |
| +Depreciation | 3000 | 3000 | 3000 | 3000 | ||
| =after tax operating cash flow | 372 | 1010.75 | 4368.75 | 6650 | ||
| +Proceeds from sale of equipment after tax | =selling price* ( 1 -tax rate) | 2628 | ||||
| +Tax shield on salvage book value | =Salvage value * tax rate | 0 | ||||
| =Terminal year after tax cash flows | 2628 | |||||
| Total Cash flow for the period | -12000 | 372 | 1010.75 | 4368.75 | 9278 | |
| Discount factor= | (1+discount rate)^corresponding period | 1 | 1.066766 | 1.13799 | 1.2139692 | 1.2950212 |
| Discounted CF= | Cashflow/discount factor | -12000 | 348.7175 | 888.1888 | 3598.7322 | 7164.3613 |
| NPV= | Sum of discounted CF= | -0.000187444 | ||||
| IRR is discount rate at which NPV = 0 = | 6.68% | |||||
jeff jeffy answered 2 years agoRelated Solutions
The table below offers EBIT for a potential capital investment for Fake Company Alpha. You should...
The table below offers EBIT for a potential capital investment
for Fake Company Alpha. You should be able to determine a few
things once you consider the following:
The initial investment is $12,000.
Depreciation is straight line over four years.
The company's WACC is estimated at 8.5%.
Company analysts estimate that a proper salvage value at the
end of the project life of four years is 30% of the initial
investment.
The company's tax rate is 27.0%.
YEAR 1
YEAR...
The table below offers EBIT for a potential capital investment for Fake Company Alpha. (This same...
The table below offers EBIT for a potential capital investment
for Fake Company Alpha. (This same project will be used for all of
your FMC #4 work.) You should be able to determine a few things
once you consider the following:
The initial investment is $2,400.
Depreciation is straight line over four years.
The company's WACC is estimated at 11.0%.
Company analysts estimate that a proper salvage value at the
end of the project life of four years is about...
The table below offers EBIT for a potential capital investment for Fake Company Zeta. (This same...
The table below offers EBIT for a potential capital investment
for Fake Company Zeta. (This same project will be used for all of
your FMC #3 work.) You should be able to determine a few things
once you consider the following:
The initial investment is $20,000.
Depreciation is straight line over four years.
The company's WACC is estimated at 9.25%.
Company analysts estimate that a proper salvage value at the
end of the project life of four years is 30%...
The table below offers EBIT for a potential capital investment for Fake Company Zeta. (This same...
The table below offers EBIT for a potential capital investment
for Fake Company Zeta. (This same project will be used for all of
your FMC #3 work.) You should be able to determine a few things
once you consider the following:
The initial investment is $20,000.
Depreciation is straight line over four years.
The company's WACC is estimated at 9.25%.
Company analysts estimate that a proper salvage value at the
end of the project life of four years is 30%...
In the Table below is information about two options that face the Alpha & Omega Company...
In the Table
below is information about two options that face the Alpha &
Omega Company as it seeks to expand its operations. Note
that all cash flows are at the end of the year except
for the initial costs.
Option 1
Option 2
Initial cost
$680,000
$720,000
Usage life
5 years
6 years
Salvage value at end of useful life
$20,000
$30,000
Cash flows (excluding salvage
value):
Year 1
$140,000
$ 80,000
Year 2
$140,000
$180,000
Year 3
$140,000
$280,000...
The information is provided in a table for Alpha Company and Bravo Company. Alpha Company Bravo...
The information is provided in a table for Alpha Company and
Bravo Company.
Alpha Company
Bravo Company
Balance 12/31/15
Assets
$65,000
Liabilities
$17,000
Equity
40,000
55,000
Balance 12/31/16
Assets
90,000
Liabilities
26,000
15,000
Equity
80,000
75,000
During the Year:
Additional Stock Issued
10,000
Dividends paid to shareholders
3,000
5,000
Revenue
90,000
Expenses
65,000
50,000
What are the amounts for each of the following missing
items?
1. Alpha Company's 12/31/15 Liabilities
2. Alpha Company's 12/31/16 Assets
3. Alpha Company's 12/31/16 Additional...
Use the information in the table below for the following 5 questions. A capital investment project...
Use the information in the table below for the following 5
questions.
A capital investment project is estimated to have the following
after-tax cash flows, by year:
0
1
2
3
4
-$50,000
$15,000
$17,500
$17,500
$25,000
The company utilizes a discount rate of 20% to evaluate capital
projects. You may have rounding errors in your calculations so
choose the closest answer. Assume cash flows are received equally
over the year.
The NET PRESENT VALUE for the project shown above...
You are considering the projects listed in the table below. Your company is currently capital constrained...
You are considering the projects listed in the table below. Your
company is currently capital constrained and cannot afford to spend
more than a total of $1,200,000 on the projects. Which combination
of projects do you recommend that the company take?
Cost
NPV
Project 1
$235,000
$72,000
Project 2
$125,000
$22,365
Project 3
$540,000
$70,235
Project 4
$450,000
$105,983
Project 5
$50,000
$16,874
Project 6
$121,000
$20,584
Project 7
$251,000
$55,451
Project 8
$95,000
$20,784
As a potential investor you have three alternatives presented to you in the table below. Your...
As a potential investor you have three alternatives presented to
you in the table below. Your goal is to construct a portfolio of
two assets (each with equal weights) chosen from the three
alternatives below.
Economic Scenario
Probability
Return: A
Return: B
Return: Risk Free Asset (RFA)
Recession
20%
5%
7%
10%
Normal
60%
15%
14%
10%
Boom
20%
25%
21%
10%
A
B
Expected Return
15%
14%
Variance
40
19.6
Covariance of A and B: +28
Calculate the correlation...
As director of capital budgeting, you are reviewing three potential investment projects with the following cost...
As director of capital budgeting, you are reviewing three
potential investment projects with the following cost and cash flow
projections.
Cash Flow
Project A
Project B
Project C
Investment Cost
($400,000)
($375,000)
($400,000)
Year One Cash Flow
$200,000
$75,000
$50,000
Year Two Cash Flow
$50,000
$75,000
$120,000
Year Three Cash Flow
$75,000
$85,000
$140,000
Year Four Cash Flow
$50,000
$225,000
$125,000
Year Five Cash Flow
$125,000
$60,000
$125,000
1.Calculate the Internal Rate of Return (IRR) for each
project.
2.Assuming your...
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