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 $	########
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

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 i ### Depreciable 7 Expected lif 10 Salvage val $0 Straight line depreciation EBIT in yea 28,000 Tax rate 38% Growth rate 3% Discount ra 10% Year 0 1 2 3 4 5 6 7 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 Net present value @ 10% Internal rate of return 8 34,436 9 35,470 10 36,534