Questions -
Q1. Calculate the Internal Rate of Return
An investment that costs $136,277 will reduce operating costs by $22,000 per year for 12 years.
Required -
Determine the internal rate of return of the investment (ignore taxes).
Should the investment be undertaken if the required rate of return is 15 percent?
Q2. Cash Flow Implications of Tax Losses
WesternGear.com is expected to have operating losses of $250,000 in its first year of business and $150,000 in its second year. However, the company expects to have income before taxes of $300,000 in its third year and $450,000 in its fourth year. The company's required rate of return is 13 percent.
Required - Assume a tax rate of 40 percent and that current losses can be used to offset taxable income in future years. What is the present value of tax savings related to the operating losses in years 1 and 2?
Q3. Calculate the Payback Period
The Sunny Valley Wheat Cooperative is considering the construction of a new silo. It will cost $132,000 to construct the silo. Determine the payback period if the expected cash inflows are $22,000 per year.