The Charlotte Bobcats, a professional basketball team, has been offered the opportunity to purchase the contract of
YEAR INCREMENTAL RETURNS
1 .............. $450,000
2 .............. 350,000
3 .............. 275,000
4 ............... 200,000
The general manager has been told by the owners of the team that any capital expenditures must yield at least 12 percent after taxes. The firm’s (marginal) income tax rate is 40 percent. Furthermore, a check of the tax regulations indicates that the team can depreciate the $800,000 initial expenditure over the four-year period.
a. Calculate the internal rate of return and the net present value to determine the desirability of this investment.
b. Should the Bobcats sign the superstar?
Net Present Value
What is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at... Internal Rate of Return
Internal Rate of Return of IRR is a capital budgeting tool that is used to assess the viability of an investment opportunity. IRR is the true rate of return that a project is capable of generating. It is a metric that tells you about the investment... Capital Budgeting
Capital budgeting is a practice or method of analyzing investment decisions in capital expenditure, which is incurred at a point of time but benefits are yielded in future usually after one year or more, and incurred to obtain or improve the...
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