1. Consider a capital expenditure project with an expected 5-year economic life and forecasted revenues equal to $40,000 per year; cash expenses are estimated to be $29,000 per year. The cost of the project equipment is $25,000, and the equipment’s estimated salvage value at the end of the project is $9000.The equipment’s cost will be depreciated using the straight-line method. The project requires a $7,000 working capital investment in year 0 and another $5,000 in year 1. The company’s marginal tax rate is 40%. Fill in the Initial net investment and the yearly cash flow table below
initial
year 1
year 2
year 3
year 4
year 5
2. If the firm’s cost of capital is 6.5%, what is the Net Present Value of the Project.
3. What is the Internal Rate of return of the Project.
4. Consider a project to upgrade data entry software. It has an expected 3-year economic life. Your current software is responsible for $130,000 a year in revenue but costs $45,000 a year to pay someone to enter the data. The upgrade will automate that so you only have to pay $5,000 a year for offsite monitoring of the program. The cost of the software $72,000, and it will require no changes in net working capital. You cannot sell the existing software and the new software cannot be sold at the end of the three years either.
initial
year 1
year 2
year 3
5. If the firm’s cost of capital is 8%, what is the Net Present Value of the Project.
6. What is the Internal Rate of return of the Project.