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Try me corporation is contemplating investing in a project that will incur an initial investment of...

Try me corporation is contemplating investing in a project that will incur an initial investment of $1,000,000. The project has a useful and depreciable life of 5 years. The firm will depreciate the investment cost using a straight-line depreciation over its five-year life. The firm is in 25% marginal tax rate. The project is expected to produce a cash flow before depreciation and taxes of $350,000 per year throughout the life of the project. At the end of the life, the project will be sold for a price of $50,000. The firm's required rate of return for similar risk project is 14%. Based on the above information compute the following and determine under each criteria if the firm should accept the project.

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Answer #1
Year Cash flow Depreciation PBT Tax NI After tax cash flow Salvage after tax Total Cash flow
0 -1000000 $ -1,000,000.00
1 350000 200000 150000 37500 112500 312500 $     312,500.00
2 350000 200000 150000 37500 112500 312500 $     312,500.00
3 350000 200000 150000 37500 112500 312500 $     312,500.00
4 350000 200000 150000 37500 112500 312500 $     312,500.00
5 350000 200000 150000 37500 112500 312500 37500 $     350,000.00
IRR 17.72%
NPV $92,314.13

Since NPV is positive at 14% and IRR is greater than cost of capital tehrefore the project shall be accepted.

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