Class time: TTH 9 NPV (55 points) Your company is undertaking a new project. A b
ID: 2409652 • Letter: C
Question
Class time: TTH 9 NPV (55 points) Your company is undertaking a new project. A building was purchased 10 years ago for value) over 30 years. It is now worth $200,000. S650,000 depreciated straight line to $50,000 (ie, the land The project requires improvements to the building of $100,000. The improvements are depreciated straight line to zero over the life of the proiest The project will generate revenues of $225,000, $250,000, $275,000 and $300,000 for years 1-4, respectively. Annual cash operating expenses are $100,000, $110,000, $130,000 and $150,000, respectively The project will last 4 years, at which time the building will be sold for book value. Taxes are 40% and rate of return is 10%. co al depreciation on the building and inprovements s points) b. Show projected annual income statements for years 1,2,3,4. (5 points)Explanation / Answer
g.
Payback Period
Cash inflows of project
Less:OperatingExpenses
Payback Period will be:
2 Years+ ($25,000/95,000)*12 = 2 years 3.15 months
h.
Discounted Payback Period
Net Present Value (NPV) of project = Present Value of Cash Inflows - Present Value of Cash Outflows
= $289,718 - $200,000
= $89,718
Years 1 2 3 4 Revenue($) 225,000 250,000 275,000 300,000Less:OperatingExpenses
(100,000) (110,000) (130,000) (150,000) Cash flow before Depriciation and Tax($) 125,000 140,000 145,000 150,000 Less: Depriciation($) (20,000) (20,000) (20,000) (20,000) Inflow before tax($) 105,000 120,000 125,000 130,000 Less: Tax($) (42,000) (48,000) (50,000) 52,000 Earnings after tax($) 63,000 72,000 75,000 78,000 Add: Depriciation($) 20,000 20,000 20,000 20,000 Net cash inflows($) 83,000 92,000 95,000 98,000