A company spent $45,000 on a market study and $30,000 on consulting 3 months ago. If the company approves the project, it will spend $448,000 on new machinery, $15,000 on installation, and $5,000 on shipping. The machine will be depreciated through simplified straight-line depreciation over its 8-year life. The expected sales increase from this new project is $700,000 a year, and the expected incremental expenses are $250,000 a year. To start this new project, the company will invest $100,000 in working capital. The marginal tax rate is 40%. What is the annual net cash flow per year from this project?
|
The initial outlay of a project is $10 million. The 12-year project is expected to generate annual net cash flows of $1 million each year and have an expected terminal value at the end of the project of $4 million. The cost of capital is 22 percent, and the firm's marginal tax rate is 40 percent. What is the internal rate of return of this project.
|
Given, Revenue=$700,000
Expenses=$250,000
Operating profit=$700,000-$250,000=$450,000
Depreciation=Total cost/life of the machinery=448,000/8=56,000
Operating profit after depreciation=$450,000-$56,000=$394,000
Taxes=40%*$394,000=$157,600
Operating profit after taxes=$394,000-$157,600=$236,400
We should add back depreciation because it is a non cash expense and will shown for tax gains.
Cashflows per year=$236,400+56,000=$292,400 (Option b is correct)
2. The cashflows are shown below in millions and for Year12 cashflow we should add salvage value of $4 million becoming the total cashflows to $5 million
=IRR(Year0 to Year12 cashflows)
IRR=6.56%
| Year0 | -10 |
| Year1 | 1 |
| Year2 | 1 |
| Year3 | 1 |
| Year4 | 1 |
| Year5 | 1 |
| Year6 | 1 |
| Year7 | 1 |
| Year8 | 1 |
| Year9 | 1 |
| Year10 | 1 |
| Year11 | 1 |
| Year12 | 5 |
| IRR | 6.56% |
Option d is correct
Get Answers For Free
Most questions answered within 1 hours.