Question

Consider an eight-year project which has an initial capital expenditure of $1,000,000 (after tax calculation and non-depreciable), annual income of $300,000 beginning at the end of year 1, and annual operating costs of $80,000 beginning at the end of year 1. Assume incomes increase at the rate of 7% whereas costs increase at the rate of 5%. Also assume tax rate to be 30% of taxable income.

a) Calculate the net cash flows of this project in actual dollar

b) Determine the market interest rate under which the net present value of the project is zero.

Please submit your solution in as a one-pager pdf document. (Hand-written submissions are not acceptable and if the submitted document has more than one page, only the first page will be marked)

Answer 1