Chapter 7 Problem 12

a). Complete the spreadsheet below by estimating the project's annual after tax cash flow. b). What is the investment's net present value at a discount rate of 10 percent?

c). What is the investment's internal rate of return?

d). How does the internal rate of return change if the discount rate equals 20 percent?

e). How does the internal rate of return change if the growth rate in EBIT is 8 percent instead of 3 percent?

Facts and Assumptions Equipment

initial cost $ $350,000

Depreciable life yrs. 7 Expected life yrs. 10

Salvage value $ $0

Straight line depreciation

EBIT in year 1 28,000

Tax rate 38%

Growth rate in EBIT 3%

Discount rate 10%

Year 0 1 2 3 4 5 6 7 8 9 10

Initial cost 350,000

Annual depreciation 50,000 50,000 50,000 50,000 50,000 50,000 50,000

EBIT 28,000 28,840 29,705 30,596 31,514 32,460 33,433 34,436 35,470 36,534

Net present value @ 10%

Internal rate of return