Question

your company is undertaking a new project. a building was purchased 10 years ago for$ 750,000 depreciated straight line to $150,000( the land value) over 30 years. it is now worth $500,000( including $150,000 land).the project requires improvements to the building of $100,000 the improvements are depreciated straight line to zero over the life of the project. the project will generate revenues of $325,000$350,000$375,000$400,000 for years 1-4 respectively. Annual cash operating expenses are $80,000$100,000$120,000and $140,000, respectively. the project will last 4 years, at which time the building will be sold for $600,000 taxes are 40% and rate of return is 10% using excel, prepare a spreadsheet and upload:

1. what is the total depreciation per year?

2. show projected annual income statements.

3. what is the initial cost(CFO)?

4. what are annual operating cash flows?

5. what is the ending cash flow from the sales of the assets?

6. what is the total annual cash flow

7.what is NPV? show work

8.what is profitability index? show work(at least 2 decimals)

9.what is payback in whole years?

10.what is average accounting return?(correct format with at least 2 decimals)

11.show how(algebraic format),IRR would be solved(do not solve)

Answer #1

1. Total depreciation per year = Cost of Improvement - Depreciated Value / Life of asset = (100000 - 0) / 4 = $ 25,000 (Since existing building is fully depreciated, its depreciation is ignored)

2. Projected annual income statements.

Year | Cash Revenues | Cash Expenses | EBDT (Revenue - Expenses) | Depreciation | EBT | taxes@40% | EAT |

1 | 325000 | 80000 | 245000 | 25000 | 220000 | 88000 | 132000 |

2 | 350000 | 100000 | 250000 | 25000 | 225000 | 90000 | 135000 |

3 | 375000 | 120000 | 255000 | 25000 | 230000 | 92000 | 138000 |

4 | 400000 | 140000 | 260000 | 25000 | 235000 | 94000 | 141000 |

3. Initial cost(CFO) = Cost of Improvemnt = $ 100,000

4. Annual operating cash flows

Cash Flow = EAT + Depreciation

EAT | Add Depreciation | Cash Inflow |

132000 | 25000 | 157000 |

135000 | 25000 | 160000 |

138000 | 25000 | 163000 |

141000 | 25000 | 166000 |

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