A corporation has an investment opportunity that will involve a time zero $110,000 depreciable cost for machinery and equipment. It will be depreciated starting in year 1 with an additional machinery and equipment expenditure of $60,000 at the end of year 1. Use 7 year life modified ACRS depreciation for all equipment with the half year convention in the first year. Working capital investment of $30,000 is required at time zero. Income attributed to this investment is $200,000 in year 1 and $300,000 per year in years 2 and 3. Operating costs are estimated to be $150,000 the first year and $180,000 per year in years 2 and 3. The effective tax rate is 40%. It is estimated that the business developed by this investment could be sold at the end of year 3 for $250,000 (including equipment and working capital). What discounted cash flow rate of return would be earned by this investment opportunity? What is the NPV at the 15% DCFROR?
A) DCFROR = 39.26%; NPV @ 15% = +77,653
B) DCFROR = 37.17%; NPV @ 15% = +90,628
C) DCFROR = 39.26%; NPV @ 15% = +90,628
D) DCFROR = 37.17%; NPV @ 15% = +77,653
A corporation has an investment opportunity that will involve a time zero $110,000 depreciable cost for machinery and equipment. It will be depreciated starting in year 1 with an additional machinery and equipment expenditure of $60,000 at the end of year 1. Use 7 year life modified ACRS depreciation for all equipment with the half year convention in the first year. Working capital investment of $30,000 is required at time zero. Income attributed to this investment is $200,000 in year 1 and $300,000 per year in years 2 and 3. Operating costs are estimated to be $150,000 the first year and $180,000 per year in years 2 and 3. The effective tax rate is 40%. It is estimated that the business developed by this investment could be sold at the end of year 3 for $250,000 (including equipment and working capital). What discounted cash flow rate of return would be earned by this investment opportunity? What is the NPV at the 15% DCFROR?
A) DCFROR = 39.26%; NPV @ 15% = +77,653
B) DCFROR = 37.17%; NPV @ 15% = +90,628
C) DCFROR = 39.26%; NPV @ 15% = +90,628
D) DCFROR = 37.17%; NPV @ 15% = +77,653
Related questions
| Revenues generated by a new fad product are forecast as follows: |
| Year | Revenues |
| 1 | $54,000 |
| 2 | 30,000 |
| 3 | 20,000 |
| 4 | 10,000 |
| Thereafter | 0 |
| | |
| Expenses are expected to be 50% of revenues, and working capital required in each year is expected to be 10% of revenues in the following year. The product requires an immediate investment of $50,000 in plant and equipment. |
| a. | What is the initial investment in the product? Remember working capital. |
| Initial investment | $ |
| b. | If the plant and equipment are depreciated over 4 years to a salvage value of zero using straight-line depreciation, and the firmâs tax rate is 30%, what are the project cash flows in each year? Assume the plant and equipment are worthless at the end of 4 years. (Do not round intermediate calculations.) |
| Year | Cash Flow |
| 1 | $ |
| 2 | |
| 3 | |
| 4 | |
| | |
| c. | If the opportunity cost of capital is 12%, what is the project's NPV? (A negative value should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.) |
| NPV | $ |
| d. | What is project IRR? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) |
| IRR | % |
