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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

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

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

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

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