Question

With an initial outlay of $100,000, Goldie’s Retreat is researching an expansion of their bed-n-breakfast by offering a Sunday brunch. The owner expects to see their money returned within 4 years and estimates an expected rate of return of 7%. With the following projected free cash flows, should the owner proceed with the investment? Use NPV and IRR to explain your answer.

IO = -$100,000

FCF Year 1 = $50,000

FCF Year 2 = $25,000

FCF Year 3 = $15,000

FCF Year 4 = $12,000

A. NPV = ______

B. IRR = _______

C. Should they proceed with the investment and why. _____________________

Answer #1

(A)
A company is considering a major expansion of its product line. The
initial outlay would be $10,100,000 and the project would generate
cash flows of $1,290,000 per year for 20 years. The appropriate
discount rate is 10%. (a) calculate the NPV (b) calculate the PI
(c) calculate the IRR (d) should this project be excepted?
(B) The same company is considering a new system for its lot.
The system will provide annual labor savings and reduced waste
totaling $175,000...

Will rate, thank you.
Part 1:
A project requires an initial investment of $100,000 and is
expected to produce a cash inflow before tax of $27,500 per year
for five years. Company A has substantial accumulated tax losses
and is unlikely to pay taxes in the foreseeable future. Company B
pays corporate taxes at a rate of 34% and can depreciate the
investment for tax purposes using the five-year MACRS tax
depreciation schedule. Suppose the opportunity cost of capital is...

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