Foley Systems is considering a new investment whose data are shown below. The eq
ID: 2648202 • Letter: F
Question
Foley Systems is considering a new investment whose data are shown below. The equipment would be depreciated on a straight-line basis over the project's 3-year life, would have a zero salvage value, and would require no additional net operating working capital. Revenues and operating costs are expected to be constant over the project's life. The tax rate is 35%. What is the project's NPV, IRR, Discounted Payback and Profitability Index? (Hint: Cash flows from operations are constant in Years 1 to 3.)
Cost of Capital
10.00%
Net Investment
$75,000
Revenue
$75,000
Operating Costs (excluding depreciation)
$50,000
Depreciation Rate
33.33%
Tax Rate
35.00%
Cost of Capital
10.00%
Net Investment
$75,000
Revenue
$75,000
Operating Costs (excluding depreciation)
$50,000
Depreciation Rate
33.33%
Tax Rate
35.00%
Explanation / Answer
Statement showing calculation of Present Value Particulars Time PVF@10% Amount PV Cash Outflows - 1.0000 (75,000.00) (75,000.00) PV of cash outflows (75,000.00) Cash Inflows 1.00 0.9091 25,000.00 22,727.27 Cash Inflows 2.00 0.8264 25,000.00 20,661.16 Cash Inflows 3.00 0.7513 25,000.00 18,782.87 PV of Cash Inflows 62,171.30 NPV (12,828.70) Time PVF @5% Calculations 1.00 0.9091 1/1.10 2.00 0.8264 .9091/1.10 3.00 0.7513 .8264/1.10 Net Investment 75,000.00 Life 3 Years Depreciation = (75,000- 0)/3 Depreciation = 25,000 Revenue 75,000.00 Operating Costs (50,000.00) Income before depreciation 25,000.00 Depreciation 25,000.00 Income before Tax - Tax @35% - Income after tax - Depreciation 25,000.00 Cash flows after tax 25,000.00 Statement showing calculation of Present Value Particulars Time PVF@0% Amount PV Cash Outflows - 1.0000 (75,000.00) (75,000.00) PV of cash outflows (75,000.00) Cash Inflows 1.00 1.0000 25,000.00 25,000.00 Cash Inflows 2.00 1.0000 25,000.00 25,000.00 Cash Inflows 3.00 1.0000 25,000.00 25,000.00 PV of Cash Inflows 75,000.00 NPV - Time PVF @0% Calculations 1.00 1.0000 1/1.00 2.00 1.0000 1/1.00 3.00 1.0000 1/1.00 IRR is 0% since PV of cash outflows is equal to PV of cash inflows at 0%. Time Cash Flows Cumulative cash flows 1.00 22,727.27 22,727.27 2.00 20,661.16 43,388.43 3.00 18,782.87 62,171.30 Discounted payback period cannot be computed since it has negative NPV. Project is not able to recover its costs from benefits. Profitability Index = PV of cash Flows / Initial Investment Profitability Index = 62,171.30/75,000 Profitability Index = .829