Question

Marge's Campground is considering adding a miniature golf course to its facility. The course she wants would cost $30,000, would be depreciated on a straight line basis over the 4-year life of the course, and would have zero salvage value. Marge estimates the income from the golf fees would be $28,000 a year with $10,000 of that amount being variable cost. The fixed cost would be $5,000. Marge feels that the course would net her, after costs, an additional $10,000 in revenue from her existing facilities. The project will require $1,000 of net working capital which is recoverable at the end of the project. What is the internal rate of return on this project at a tax rate of 34 percent? a. 66.76 percent b. 44.35 percent c. 26.18 percent d. 21.19 percent e. 24.50 percent

Answer 1

Option B

WORKINGS

Operating cash flows

Year	NetIncome from golf fees	Variable cost	Fixed cost	Additionalrevenue	Depreciation	Profit before tax	Tax	Profit after tax	OCF
1	28000	-10000	-5000	10000	-7500	15500	-5270	10230	17730
2	28000	-10000	-5000	10000	-7500	15500	-5270	10230	17730
3	28000	-10000	-5000	10000	-7500	15500	-5270	10230	17730
4	28000	-10000	-5000	10000	-7500	15500	-5270	10230	17730

Net Cash flows

Year	Initialcost	Working capital	OCF	Net cash flow
0	-30000	-1000		-31000
1			17730	17730
2			17730	17730
3			17730	17730
4		1000	17730	18730

IRR is computed using Excel IRR function