Question

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.

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.