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A $4 million investment today, in a project to last 10 years, is believed to result in the following incremental cash flows: • annual increase in sales of $2,100,000 • operating expenses will be 50% of sales • there is a $30,000 NWC investment associated with this project that is fully recovered at the end of the project's life • assets purchased for this project are depreciated to zero value using straight-line over the project's complete life • market value of assets at end of life are expected to be $50,000 firm's marginal tax rate is 32% required return on the project is 12% compounded annually What is the NPV of this project? Enter answer in dollars, rounded to the nearest dollar.

A $4 million investment today, in a project to last 10 years, is believed to result in the following incremental cash flows: • annual increase in sales of $2,100,000 • operating expenses will be 50% of sales • there is a $30,000 NWC investment associated with this project that is fully recovered at the end of the project's life • assets purchased for this project are depreciated to zero value using straight-line over the project's complete life • market value of assets at end of life are expected to be $50,000 firm's marginal tax rate is 32% required return on the project is 12% compounded annually What is the NPV of this project? Enter answer in dollars, rounded to the nearest dollar.

Essentials Of Investments
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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Putting it all together. Additions and changes to the previous problem are noted in red. NPV = PV (OCFs) + PV (after tax salvage) + PV (NWC) - PV (Investment) A $4 million investment today, in a project to last 10 years, is believed to result in the following incremental cash flows: annual increase in sales of $2,100,000 operating expenses will be 50% of sales ● there is a $30,000 NWC investment associated with this project that is fully recovered at the end of the project's life assets purchased for this project are depreciated to zero value using straight-line over the project's complete life ● market value of assets at end of life are expected to be $50,000 firm's marginal tax rate is 32% ● required return on the project is 12% compounded annually What is the NPV of this project? Enter answer in dollars, rounded to the nearest dollar. Question 26 What is the IRR of the above project? Note: this can be solved on financial calculator but is time consuming, tedious, and more prone to human error. In excel, one can link all rate cells together so when one rate cell changes, they all change (when solving for PV of NWC, Salvage, and OCFs). That way we can "goal seek" an NPV cell to zero by changing the one rate cell through which all other rate cells are linked. Question 27 What is the profitability index of the above project? Hint: easiest to use PI = 1+ NPV Investment Enter answer rounded to 4th digit, as in "1.2345". Question 28 What is the payback period of the above project? Hint: must all arrange all relevant cash-flows in a time-series manner before proceeding. Enter answer in years, rounded to the nearest hundredth, as in "1.23" years.
Transcribed Image Text:Putting it all together. Additions and changes to the previous problem are noted in red. NPV = PV (OCFs) + PV (after tax salvage) + PV (NWC) - PV (Investment) A $4 million investment today, in a project to last 10 years, is believed to result in the following incremental cash flows: annual increase in sales of $2,100,000 operating expenses will be 50% of sales ● there is a $30,000 NWC investment associated with this project that is fully recovered at the end of the project's life assets purchased for this project are depreciated to zero value using straight-line over the project's complete life ● market value of assets at end of life are expected to be $50,000 firm's marginal tax rate is 32% ● required return on the project is 12% compounded annually What is the NPV of this project? Enter answer in dollars, rounded to the nearest dollar. Question 26 What is the IRR of the above project? Note: this can be solved on financial calculator but is time consuming, tedious, and more prone to human error. In excel, one can link all rate cells together so when one rate cell changes, they all change (when solving for PV of NWC, Salvage, and OCFs). That way we can "goal seek" an NPV cell to zero by changing the one rate cell through which all other rate cells are linked. Question 27 What is the profitability index of the above project? Hint: easiest to use PI = 1+ NPV Investment Enter answer rounded to 4th digit, as in "1.2345". Question 28 What is the payback period of the above project? Hint: must all arrange all relevant cash-flows in a time-series manner before proceeding. Enter answer in years, rounded to the nearest hundredth, as in "1.23" years.
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