The company plans to make a 4-year investment to manufacture garage door openers
ID: 2614945 • Letter: T
Question
The company plans to make a 4-year investment to manufacture garage door openers driven by instant action commands. This project requires an initial investment of 4 million dollars that will be depreciated by the straight line method until reaching a value of zero throughout the life of the investment. An initial CTN amount of one million dollars is required to support the inventory of spare parts, a cost that will be fully recovered when the project ends. The company believes that it can generate 3.6 million dollars of revenue before taxes with 1.5 million in total operating costs before taxes. Thetax rate is 18% and the discount rate is 16% Year 0 Year 1 Year 3 Year 4 w. Income costs UAIID DEPRECIATION UAI Net profit investment in assets projectedflows (net present value NPV- (internal rate of return )IRRExplanation / Answer
Year
0
1
2
3
4
Income
3.6
3.6
3.6
3.6
cost
1.5
1.5
1.5
1.5
UAIID
2.1
2.1
2.1
2.1
Depreciation
1
1
1
1
UAI
1.1
1.1
1.1
1.1
Taxes
0.198
0.198
0.198
0.198
Net profit
0.902
0.902
0.902
0.902
FEO
1.902
1.902
1.902
1.902
Investment in assets
-1
1
Investment in CTN
-4
projected flows
-5
1.902
1.902
1.902
2.902
present value of cash flow at 16% = cash flow/(1+r)^n
-5
1.639655
1.413496
1.218530895
1.602749
NPV = sum of present value of cash flow
0.87
IRR =Using IRR function in MS excel =irr(-5,1.902,1.902,1.902,2.902)
23.96%
Recovery of working capital
in year 4
1
Year
0
1
2
3
4
Income
3.6
3.6
3.6
3.6
cost
1.5
1.5
1.5
1.5
UAIID
2.1
2.1
2.1
2.1
Depreciation
1
1
1
1
UAI
1.1
1.1
1.1
1.1
Taxes
0.198
0.198
0.198
0.198
Net profit
0.902
0.902
0.902
0.902
FEO
1.902
1.902
1.902
1.902
Investment in assets
-1
1
Investment in CTN
-4
projected flows
-5
1.902
1.902
1.902
2.902
present value of cash flow at 16% = cash flow/(1+r)^n
-5
1.639655
1.413496
1.218530895
1.602749
NPV = sum of present value of cash flow
0.87
IRR =Using IRR function in MS excel =irr(-5,1.902,1.902,1.902,2.902)
23.96%
Recovery of working capital
in year 4
1