4. A large corporation subjected to 35% tax is investing in a new income producing asset that is depreciated on a MACRS 3 year schedule. The full price of the asset is 250,000 but the asset will be financed at an interest rate of 8.00% over 5 years after a down payment of 150,000. The expected revenue and costs in constant dollars (year 0) by year are given below. Based on historical costs, the expected inflation of costs is expected to be 3.0%. Year Direct Revenue QUESTION 5 0 1 120,000 QUESTION 7 85,000 2 150,000 b. compute the real IRR (without inflation) 3 4 250,000 320,000 Direct and 100,000 120,000 150,000 170,000 200,000 Allocated Cost Note that is inflation does not apply to finance costs of principal and interest payments. When retired, the asset will have no value. The firm's MARR is 15% in real dollars. a. Compute the actual IRR QUESTION 6 c. compute the PV in actual dollars discounted at the 15% actual rate 5 d. compute the PV in real dollars discounted at the real interest rate. 320,000 6 320,000
4. A large corporation subjected to 35% tax is investing in a new income producing asset that is depreciated on a MACRS 3 year schedule. The full price of the asset is 250,000 but the asset will be financed at an interest rate of 8.00% over 5 years after a down payment of 150,000. The expected revenue and costs in constant dollars (year 0) by year are given below. Based on historical costs, the expected inflation of costs is expected to be 3.0%. Year Direct Revenue QUESTION 5 0 1 120,000 QUESTION 7 85,000 2 150,000 b. compute the real IRR (without inflation) 3 4 250,000 320,000 Direct and 100,000 120,000 150,000 170,000 200,000 Allocated Cost Note that is inflation does not apply to finance costs of principal and interest payments. When retired, the asset will have no value. The firm's MARR is 15% in real dollars. a. Compute the actual IRR QUESTION 6 c. compute the PV in actual dollars discounted at the 15% actual rate 5 d. compute the PV in real dollars discounted at the real interest rate. 320,000 6 320,000
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:4. A large corporation subjected to 35% tax is investing in a new income producing asset that is depreciated on a MACRS 3 year schedule. The full price of the asset is 250,000 but the asset will be
financed at an interest rate of 8.00% over 5 years after a down payment of 150,000. The expected revenue and costs in constant dollars (year 0) by year are given below. Based on historical costs, the
expected inflation of costs is expected to be 3.0%.
Year
Direct
Revenue
QUESTION 5
0
QUESTION 6
1
120,000
QUESTION 7
b. compute the real IRR (without inflation)
2
150,000
3
250,000
4
320,000
Direct and
85,000
100,000 120,000 150,000 170,000 200,000
Allocated Cost
Note that is inflation does not apply to finance costs of principal and interest payments. When retired, the asset will have no value. The firm's MARR is 15% in real dollars.
a. Compute the actual IRR
c. compute the PV in actual dollars discounted at the 15% actual rate
5
d. compute the PV in real dollars discounted at the real interest rate.
6
320,000 320,000
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