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ACCT1020: Evaluation of an Investment Project -With Taxes Tax Implications of Selling Investment II Continued from the previous example, recall that the tax rate is 35% and that the book value of the investment is $5,000 at the end of year 8, as shown below: Original investment cost Accumulated depreciation over 8 years Book value at the end of year 8 $ 25,000 (20,000) $20,000 ($2,500 per year * 8 years) $ 5,000 Required: 1. For each example below, what is the after-tax cash flow from selling the investment at the end of year 8? 2. Using what you found above, for each example below, compute the payback period, NPV, and IRR for the project. Should the company accept this investment project? ACCT1020: Evaluation of an Investment Project--With Taxes Capital Budgeting Problems II Bennett Company is considering investing in a project. The following information is available. Investment Cost of the project Useful Life of the investment Salvage value of the investment under tax law $25,000 8 years $5,000 Expected annual sales Expected annual cash variable expenses Expected annual cash fixed expenses $10,000 $3,000 $2,000 These cash flows will continue for 8 years and will stop after that. s Income tax rate 35% Required: Required: 1. Create a Contribution Margin income statement for the first year of operations 2. What is the annual after-tax cash flow generated by this investment? 3. What is the project's payback period? 4. Compute the Net Present Value (NPV) of this project using a 10% discount rate. 5. What is the Internal Rate of Return (IRR) of the investment project? 6. The company's required rate of retum is 10% and has a policy to accept only projects with a payback period of 3 years or less. Should the company accept this investment project? Why

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