The table below offers EBIT for a potential capital investment for Fake Company Zeta. (This same...

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The table below offers EBIT for a potential capital investmentfor Fake Company Zeta. (This same project will be used for all ofyour FMC #3 work.) You should be able to determine a few thingsonce you consider the following:
The initial investment is $20,000.
Depreciation is straight line over four years.
The company's WACC is estimated at 9.25%.
Company analysts estimate that a proper salvage value at theend of the project life of four years is 30% of the initialinvestment.
The company's tax rate is 30.0%.
YEAR 1 YEAR 2 YEAR 3 YEAR 4
EBIT $(1,750) $325 $1,025 $3,700
What is this project's internal rate of return?

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4.5 Ratings (650 Votes)

Time line		0	1	2	3	4



Cost of new machine		-20000

=Initial Investment outlay		-20000


=Pretax cash flows			-1750	325	1025	3700
-taxes	=(Pretax cash flows)*(1-tax)		-1225	227.5	717.5	2590
+Depreciation			5000	5000	5000	5000
=after tax operating cash flow			3775	5227.5	5717.5	7590



+Proceeds from sale of equipment after tax	=selling price* ( 1 -tax rate)					4200
+Tax shield on salvage book value	=Salvage value * tax rate					0
=Terminal year after tax cash flows						4200

Total Cash flow for the period		-20000	3775	5227.5	5717.5	11790
Discount factor=	(1+discount rate)^corresponding period	1	1.101939809	1.21427134	1.33805393	1.47445489
Discounted CF=	Cashflow/discount factor	-20000	3425.776951	4305.05095	4272.99667	7996.17543
NPV=	Sum of discounted CF=	5.78843E-06
IRR is discount rate at which NPV = 0 =	10.19%

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The table below offers EBIT for a potential capital investmentfor Fake Company Zeta. (This same project will be used for all ofyour FMC #3 work.) You should be able to determine a few thingsonce you consider the following:The initial investment is $20,000.Depreciation is straight line over four years.The company's WACC is estimated at 9.25%.Company analysts estimate that a proper salvage value at theend of the project life of four years is 30% of the initialinvestment.The company's tax rate is 30.0%.YEAR 1YEAR 2YEAR 3YEAR 4EBIT$(1,750)$325$1,025$3,700What is this project's internal rate of return?

	YEAR 1	YEAR 2	YEAR 3	YEAR 4
EBIT	$(1,750)	$325	$1,025	$3,700