The table below offers EBIT for a potential capital investment for Fake Company Alpha. You should...
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The table below offers EBIT for a potential capital investmentfor Fake Company Alpha. You should be able to determine a fewthings once you consider the following:
- The initial investment is $12,000.
- Depreciation is straight line over four years.
- The company's WACC is estimated at 8.5%.
- 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 27.0%.
YEAR 1 YEAR 2 YEAR 3 YEAR 4 EBIT $(3,600) $(2,725) $1,875 $5,000
What is this project's internal rate of return?
The table below offers EBIT for a potential capital investmentfor Fake Company Alpha. You should be able to determine a fewthings once you consider the following:
- The initial investment is $12,000.
- Depreciation is straight line over four years.
- The company's WACC is estimated at 8.5%.
- 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 27.0%.
| YEAR 1 | YEAR 2 | YEAR 3 | YEAR 4 | |
| EBIT | $(3,600) | $(2,725) | $1,875 | $5,000 |
What is this project's internal rate of return?
Answer & Explanation Solved by verified expert
| Time line | 0 | 1 | 2 | 3 | 4 | |
| Cost of new machine | -12000 | |||||
| =Initial Investment outlay | -12000 | |||||
| EBIT= | -3600 | -2725 | 1875 | 5000 | ||
| -taxes | =(Pretax cash flows)*(1-tax) | -2628 | -1989.25 | 1368.75 | 3650 | |
| +Depreciation | 3000 | 3000 | 3000 | 3000 | ||
| =after tax operating cash flow | 372 | 1010.75 | 4368.75 | 6650 | ||
| +Proceeds from sale of equipment after tax | =selling price* ( 1 -tax rate) | 2628 | ||||
| +Tax shield on salvage book value | =Salvage value * tax rate | 0 | ||||
| =Terminal year after tax cash flows | 2628 | |||||
| Total Cash flow for the period | -12000 | 372 | 1010.75 | 4368.75 | 9278 | |
| Discount factor= | (1+discount rate)^corresponding period | 1 | 1.066766 | 1.13799 | 1.2139692 | 1.2950212 |
| Discounted CF= | Cashflow/discount factor | -12000 | 348.7175 | 888.1888 | 3598.7322 | 7164.3613 |
| NPV= | Sum of discounted CF= | -0.000187444 | ||||
| IRR is discount rate at which NPV = 0 = | 6.68% | |||||
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The table below offers EBIT for a potential capital investmentfor Fake Company Alpha. You should be able to determine a fewthings once you consider the following:The initial investment is $12,000.Depreciation is straight line over four years.The company's WACC is estimated at 8.5%.Company analysts estimate that a proper salvage value at theend of the project life of four years is 30% of the initialinvestment.The company's tax rate is 27.0%.YEAR 1YEAR 2YEAR 3YEAR 4EBIT$(3,600)$(2,725)$1,875$5,000What is this project's internal rate of return?
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