Description of this paper

Loading

Question 7 (15 points) a). Complete the spreadsheet below by-(Answered)

Description

Instant Solution ? Click "Buy button" to Download the solution File


Question


Question 7 (15 points) a). Complete the spreadsheet below by estimating the project's annual after tax cash flow. b). What is the investment's net present value at a discount rate of 10 percent? c). What is the investment's internal rate of return? d). How does the internal rate of return change if the discount rate equals 20 percent? e). How does the internal rate of return change if the growth rate in EBIT is 8 percent instead of 3 percent? Facts and Assumptions Equipment initial cost $ $ 3,50,000 Depreciable life yrs. 7 Expected life yrs. 10 Salvage value $ $0 Straight line depreciation EBIT in year 1 28,000 Tax rate 38% Growth rate in EBIT 3% Discount rate 10% Year 0 1 2 3 4 5 6 7 8 9 10 Initial cost 3,50,000 Annual depreciation 50,000 50,000 50,000 50,000 50,000 50,000 50,000 EBIT 28,000 28,840 29,705 30,596 31,514 32,460 33,433 34,436 35,470 36,534 Taxes EBIT after tax After tax cash flow Net present value @ 10% Internal rate of return


Question 7 (15 points)

 

a). Complete the spreadsheet below by estimating the project's annual after tax cash flow.

 

b). What is the investment's net present value at a discount rate of 10 percent?

 

c). What is the investment's internal rate of return?

 

d). How does the internal rate of return change if the discount rate equals 20 percent?

 

e). How does the internal rate of return change if the growth rate in EBIT is 8 percent instead of 3 percent?

 

Facts and Assumptions

 

Equipment initial cost $

 

Depreciable life yrs.

 

Expected life yrs.

 

Salvage value $

 

Straight line depreciation

 

EBIT in year 1

 

Tax rate

 

Growth rate in EBIT

 

Discount rate

 

Year

 

Initial cost

 

EBIT

 

Less - taxes

 

Earnings after tax

 

Add - annual depreciation

 

Net cash flows

 

Discount rate @ 10%

 


 

$

 


 

350,000

 

7

 

10

 

$0

 

28,000

 

38%

 

3%

 

10%

 

31-Dec-14

 

31-Dec-15 31-Dec-16 31-Dec-17 31-Dec-18

 

(350,000)

 

28,000

 

28,840

 

29,705

 

30,596

 

10,640

 

10,959

 

11,288

 

11,627

 

17,360

 

17,881

 

18,417

 

18,970

 

50,000

 

50,000

 

50,000

 

50,000

 

(350,000)

 

67,360

 

67,881

 

68,417

 

68,970

 

1

 


 

0.909

 


 

0.826

 


 

0.751

 


 

0.683

 


 

Present value of cash flows

 

Net Present Value discount

 

rate of 10%

 

Internal rate of return

 


 

(350,000)

 


 

61,236

 


 

56,100

 


 

51,403

 


 

47,107

 


 

Discount rate @ 20%

 

Present value of cash flows

 

Net Present Value discount

 

rate of 10%

 


 

1

 

(350,000)

 


 

0.833

 

56,133

 


 

0.694

 

47,139

 


 

0.579

 

39,593

 


 

0.482

 

33,261

 


 

Year

 

Initial cost

 

EBIT

 

Less - taxes

 

Earnings after tax

 

Add - annual depreciation

 

Net cash flows

 

Internal rate of return

 


 

31-Dec-14

 

31-Dec-15 31-Dec-16 31-Dec-17 31-Dec-18

 

(350,000)

 

28,000

 

30,240

 

32,659

 

35,272

 

10,640

 

11,491

 

12,410

 

13,403

 

17,360

 

18,749

 

20,249

 

21,869

 

50,000

 

50,000

 

50,000

 

50,000

 

(350,000)

 

67,360

 

68,749

 

70,249

 

71,869

 


 

instead of 3 percent?

 


 

31-Dec-19 31-Dec-20 31-Dec-21 31-Dec-22 31-Dec-23 31-Dec-24

 

31,514

 

11,975

 

19,539

 

50,000

 

69,539

 


 

32,460

 

12,335

 

20,125

 

50,000

 

70,125

 


 

33,433

 

12,705

 

20,729

 

50,000

 

70,729

 


 

34,436

 

13,086

 

21,351

 


 

35,470

 

13,478

 

21,991

 


 

36,534

 

13,883

 

22,651

 


 

21,351

 


 

21,991

 


 

22,651

 


 

0.621

 


 

0.564

 


 

0.513

 


 

0.467

 


 

0.424

 


 

0.386

 


 

43,178

 


 

39,584

 


 

36,295

 


 

9,960

 


 

9,326

 


 

8,733

 

12,923 b

 

10.98% c

 


 

0.402

 

27,946

 


 

0.335

 

23,485

 


 

0.279

 

19,739

 


 

0.233

 

4,965

 


 

0.194

 

4,262

 


 

0.162

 

3,658

 

(89,817) d

 


 

Net present value falls and turns ne

 


 

31-Dec-19 31-Dec-20 31-Dec-21 31-Dec-22 31-Dec-23 31-Dec-24

 

38,094

 

14,476

 

23,618

 

50,000

 

73,618

 


 

41,141

 

15,634

 

25,508

 

50,000

 

75,508

 


 

44,432

 

16,884

 

27,548

 

50,000

 

77,548

 


 

47,987

 

18,235

 

29,752

 


 

51,826

 

19,694

 

32,132

 


 

55,972

 

21,269

 

34,703

 


 

29,752

 


 

32,132

 


 

34,703

 

12.79% e

 


 

If EBIT will increase by 8% every y

 


 

ent value falls and turns negative

 


 

ill increase by 8% every year, then IRR will also increase

 


 

 

Paper#9210176 | Written in 27-Jul-2016

Price : $19
SiteLock