The Avalanche Snow Company is evaluating the purchase of a new snow-making machine. The marketing and production
Question:
The Avalanche Snow Company is evaluating the purchase of a new snow-making machine. The marketing and production managers have provided the following numbers in revenue and expenses associated with the new machines, and the accountant has calculated the depreciation on the machines for the next four years. Assume that there is no investment in working capital in each year:
Year | 1 | 2 | 3 | 4 |
Sales | $100,000 | $150,000 | $125,000 | $100,000 |
Expenses | $50,000 | $75,000 | $75,000 | $75,000 |
Depreciation | $20,000 | $20,000 | $20,000 | $20,000 |
a) What is the operating cash flow for each year if the tax rate is 30%? What is the IRR then?
b) What is the operating cash flow for each year if the tax rate is 40%? What is the IRR then?
c) What is the operating cash flow for each year if the tax rate is 50%? What is the IRR then?
d) Suppose the probability of a 30% tax rate is 10%, the probability of a 40% tax rate is 30%, and the probability of a 50% tax rate is 60%. What is the expected IRR for Avalanche? What is the standard deviation of IRR? What is the coefficient of variation for IRR?
Corporate Finance A Focused Approach
ISBN: 978-1439078082
4th Edition
Authors: Michael C. Ehrhardt, Eugene F. Brigham