Question

In: Accounting

Iris Company is considering a new investment project. The initial investment for the project is $200,000....

Iris Company is considering a new investment project. The initial investment for the project is $200,000. Iris is trying to estimate the net cashflows after tax for this investment. She has already figured out that the investment will generate an annual after-tax cash inflow of $54,000 from the operation. For tax purposes, the projected salvage value of the investment is $25,500. The government requires depreciating the vehicles using the straight-line method over the investment's life of 8 years.

q1)

Iris estimates that the maximum value it can sell the investment at the end of 8 years is $38,000. Assuming the tax rate of 30%, what is the net after-tax cashflow Iris will receive from selling the investment at the end of 8 years?

q2)

Iris estimates that the minimum value it can sell the investment at the end of 8 years is $20,000. Assuming the tax rate of 30%, what is the net after-tax cashflow Iris will receive from selling the investment at the end of 8 years?

q3) Finally, Iris expects that it will most likely sell the investment with the minimum value at $20,000. Under this assumption, what is the Internal Rate of Return (IRR) for Iris's investment project? (For this question, you should be able to choose the correct IRR calculated by your calculator.)  

Solutions

Expert Solution

Answer 1 Net after-tax cashflow          34,250
Answer 2 Net after-tax cashflow          21,650
Answer 3 Internal Rate of Return (IRR) 22%

Calculation


Related Solutions

The Elkton Company is considering a new project that requires an initial investment of $24,000,000 to...
The Elkton Company is considering a new project that requires an initial investment of $24,000,000 to build a new plant and purchase equipment. The investment will be depreciated using the straight line method over 10 years.   The new plant will be built on some of the company's land which has a current, after-tax market value of $5,000,000.  The company will produce widgets at a cost of $130 each and will sell them for $420 each. Annual fixed costs are $500,000.  Sales (in units)...
The Elkton Company is considering a new project that requires an initial investment of $24,000,000 to...
The Elkton Company is considering a new project that requires an initial investment of $24,000,000 to build a new plant and purchase equipment. The investment will be depreciated using the straight line method over 10 years.   The new plant will be built on some of the company's land which has a current, after-tax market value of $5,000,000.  The company will produce widgets at a cost of $130 each and will sell them for $420 each. Annual fixed costs are $500,000.  Sales (in units)...
Your company is considering a new 3-year project that requires an initial investment in equipment of...
Your company is considering a new 3-year project that requires an initial investment in equipment of $3 million. Prior to this, you had engaged a consultant to study the feasibility of the new project and after an extensive market survey, the consultant confirmed your belief that the project would be viable. Your company is charged $100,000 for the feasibility study. The equipment will be depreciated straight line to zero over the 3 years of its useful life. In addition, you...
Your company is considering a new 3-year project that requires an initial investment in equipment of...
Your company is considering a new 3-year project that requires an initial investment in equipment of $3 million. Prior to this, you had engaged a consultant to study the feasibility of the new project and after an extensive market survey, the consultant confirmed your belief that the project would be viable. Your company is charged $100,000 for the feasibility study. The equipment will be depreciated straight line to zero over the 3 years of its useful life. In addition, you...
Company XYZ is considering project A. Project A requires an initial investment of $75,000.
Company XYZ is considering project A. Project A requires an initial investment of $75,000. It generates $35,000 each year for the coming 3 years. What is the discounted payback period for this project if the proper discount rate is 18%?
You are considering a project that will require an initial outlay of $200,000. This project has...
You are considering a project that will require an initial outlay of $200,000. This project has an expected life of five years and will generate after-tax cash flows to the company as a whole of $60,000 at the end of each year over its five-year life.      Thus, the free cash flows associated with this project look like this. Given a required rate of return of 10% percent, calculate the following: Discounted payback period b.     Net present value Profitability index...
Kuhn Corporation is considering a new project that will require an initial investment of $4,000,000. It...
Kuhn Corporation is considering a new project that will require an initial investment of $4,000,000. It has a target capital structure consisting of 45% debt, 4% preferred stock, and 51% common equity. Kuhn has noncallable bonds outstanding that mature in five years with a face value of $1,000, an annual coupon rate of 10%, and a market price of $1,050.76. The yield on the company’s current bonds is a good approximation of the yield on any new bonds that it...
A firm is considering a project that requires an initial investment of $300,000 in new equipment,...
A firm is considering a project that requires an initial investment of $300,000 in new equipment, which has a five-year life and a CCA rate of 30 percent. An initial investment in raw materials inventory of $50,000 is also required to support the project, which will rise to 15 percent of sales. The project will generate sales revenue of $400,000 in the first year, which will grow at 4 percent per year. Variable costs will be $220,000 for the first...
Darfield Trading Incorporated is considering to invest in a new project. The initial investment for the...
Darfield Trading Incorporated is considering to invest in a new project. The initial investment for the project is $5,000,000 and it is expected to provide operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $1,700,000 in year 3, and $1,800,000 in year 4. Calculate the payback period for the new project. Calculate the discounted payback period assuming the firm’s cost of capital is 8 percent. Should Darfield Trading invest in the new project if the company has...
a company is considering a new 3-year expansion project that requires an initial fixed asset investment...
a company is considering a new 3-year expansion project that requires an initial fixed asset investment of $5.076 million. the fixed asset will be depreciated straight-line to zero over its 3-year tax life, after which time it will have a market value of $394,800. the project requires an initial investment in net working capital of $564000. the project estimated to generate $4512000 in annual sales, with costs of $1804800. the tax rate is 33 percent and the required return on...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT