Question

The Esmayao Collegiate Dog Corporation, needs to buy a machine so that Tarzan and Jane can raise their paw and then release a trickle of water to prevent bad smells and health problems. There is one per Amazon that the initial net investment = $ 31,400. Dr. Agustín Rullán gives permission for the machine to be purchased and installed. Dr. Rullan does not know which type of depreciation to use, whether linear or MACRS. The machine can be depreciated for 7 years, the depreciation base is $ 32,000. The difference in revenues will be zero for the next 20 years, the change in operational cost remains constant at $ 9,000 per year and there is no residual value of the machine nor is it necessary to change working capital. Estimate what the NPV will be with both depreciations if WACC = 12%, Tax = 40% and what you recommend to the principal. (20 points)

The Esmayao Dog Corporation developed a better machine than the previous problem, because the trickle of water contains the smell of roses and a dispenser of bones. The NINV = $ 80,000, which is its base for depreciation, can be depreciated for 7 years by MACRS and the project lasts 10 years. In the first year, UPRM expects revenues of $ 100,000 that it expects to grow at 7% per year, an operating cost of $ 50,000 in the first year that is expected to grow at 8% per year and average taxes are 40% and WACC = twenty%. (30 points)

to. Calculate the NPV of this project and present a table that contains all the analysis of Income, Costs, Depreciation, EBT, Tax, EAT.
b. Calculate the Payback Period.
c. Calculate the PI
d. Calculate the IRR. How many IRR do you have and why?

Note: do the answer in a spreed sheet of Microsoft Excel

Answer 1

years	1	2	3	4	5	6	7	8	9	10	Total
Revenue	1,00,000.00	1,07,000.00	1,14,490.00	1,22,504.30	1,31,079.60	1,40,255.17	1,50,073.04	1,60,578.15	1,71,818.62	1,83,845.92
Opearting cost	50,000.00	54,000.00	58,320.00	62,985.60	68,024.45	73,466.40	79,343.72	85,691.21	92,546.51	99,950.23
Depreciation	11,428.57	11,428.57	11,428.57	11,428.57	11,428.57	11,428.57	11,428.57
profit	38,571.43	41,571.43	44,741.43	48,090.13	51,626.58	55,360.20	59,300.75	74,886.93	79,272.11	83,895.69
tax	15,428.57	16,628.57	17,896.57	19,236.05	20,650.63	22,144.08	23,720.30	29,954.77	31,708.84	33,558.28
Profit after tax	23,142.86	24,942.86	26,844.86	28,854.08	30,975.95	33,216.12	35,580.45	44,932.16	47,563.26	50,337.41
Add:   Depreciation	11,428.57	11,428.57	11,428.57	11,428.57	11,428.57	11,428.57	11,428.57	-	-	-
Cash inflow	34,571.43	36,371.43	38,273.43	40,282.65	42,404.52	44,644.69	47,009.02	44,932.16	47,563.26	50,337.41	4,26,390.00
PVIF at 20%	0.8333	0.6944	0.5787	0.4823	0.4019	0.3349	0.2791	0.2326	0.1938	0.1615
Present value	28,809.52	25,257.94	22,148.97	19,426.43	17,041.43	14,951.42	13,119.35	10,449.78	9,218.08	8,129.77	1,68,552.70
cost	80,000.00	0.14
depreciation	11,428.57
Balance amount	68,571.43	0.17
depreciation	11,428.57
Balance amount	57,142.86	0.20
depreciation	11,428.57
Pay back period = Investment /Annual cash inflow				Profitability index = Present value of future cash flow/investment
Investment	80,000.00			present value of future cash flow			1,68,552.70
Annual cash inflow	42,639.00			Investment			80,000.00
Pay back period	1.88			Profitability index			2.11
	2 years
At IRR NPV will be equal to zero
I am using trail and error method
years	1	2	3	4	5	6	7	8	9	10	Total	Investment	Difference
Cash inflow	34,571.43	36,371.43	38,273.43	40,282.65	42,404.52	44,644.69	47,009.02	44,932.16	47,563.26	50,337.41	4,26,390.00
PVIF at 46%	0.6849	0.4691	0.3213	0.2201	0.1507	0.1032	0.0707	0.0484	0.0332	0.0227
	23,679.06	17,062.97	12,298.12	8,865.57	6,392.16	4,609.49	3,324.38	2,176.38	1,577.96	1,143.83	81,129.93	80,000.00	1,129.93
PVIF at 47%	0.6803	0.4628	0.3148	0.2142	0.1457	0.0991	0.0674	0.0459	0.0312	0.0212
	23,517.98	16,831.61	12,048.84	8,626.78	6,177.68	4,424.52	3,169.27	2,060.72	1,483.94	1,068.36	79,409.70	80,000.00	-590.30
IRR is between 46% and 47%
AS 47 is more near it can be taken as IRR

years	1	2	3	4	5	6	7	8	9	10
Revenue	1,00,000.00	1,00,000.00	1,00,000.00	1,00,000.00	1,00,000.00	1,00,000.00	1,00,000.00	1,00,000.00	1,00,000.00	1,00,000.00
Opearting cost	50,000.00	59,000.00	68,000.00	77,000.00	86,000.00	95,000.00	1,04,000.00	1,13,000.00	1,22,000.00	1,31,000.00
Depreciation	4,571.43	4,571.43	4,571.43	4,571.43	4,571.43	4,571.43	4,571.43
profit	45,428.57	36,428.57	27,428.57	18,428.57	9,428.57	428.57	-8,571.43	-13,000.00	-22,000.00	-31,000.00
tax	18,171.43	14,571.43	10,971.43	7,371.43	3,771.43	171.43
Profit after tax	27,257.14	21,857.14	16,457.14	11,057.14	5,657.14	257.14	-8,571.43	-13,000.00	-22,000.00	-31,000.00
Add: non cash expences
Depreciation	4,571.43	4,571.43	4,571.43	4,571.43	4,571.43	4,571.43	4,571.43	-	-	-
Cash inflow	31,828.57	26,428.57	21,028.57	15,628.57	10,228.57	4,828.57	-4,000.00	-13,000.00	-22,000.00	-31,000.00
PVIF at 12 %	0.8929	0.7972	0.7118	0.6355	0.5674	0.5066	0.4523	0.4039	0.3606	0.3220
Present value	28,418.37	21,068.86	14,968.14	9,931.96	5,803.69	2,446.15	-1,809.20	-5,250.70	-7,933.20	-9,982.00