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Chapter 7 Problem 12 Suggested Answers
a). Complete the spreadsheet below by estimating the project's annual after tax cash flow.
	See spreasheet below.
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?
	12.8%	Change the "Growth rate in EBIT" assumption to 8% and observe the new IRR.
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
Taxes
EBIT after tax
After tax cash flow
											Check Figure Cell L30 = $22,651
Net present value @ 10%
Internal rate of return