An entrepreneur wants to evaluate a project for 4 years of operation. As an initial investment, project requires purchase of fixed assets for $ 20,000, which will last exactly 4 years, at end of which they are expected to have no scrap value. Expected sales revenue amounts to $9,000 per year, while total out-of-pocket expenses are expected to be $1,800 per year. IT IS REQUESTED: Considering that investor's opportunity cost is 12% and income tax rate is 27%. a) Determine income subject to income tax and net income for each year. b) Based on above, determine net cash flow for each year.c) Determine if investment under study is profitable, calculating NPV and IRR. Develop your calculations on a excel spreadsheet. Note: Assume that useful life of fixed assets for income tax purposes is equal to their economic useful life.

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
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An entrepreneur wants to evaluate a project for 4 years of operation.
As an initial investment, project requires purchase of fixed assets for $ 20,000, which will last exactly 4 years, at end of which they are expected to have no scrap value. Expected sales revenue amounts to $9,000 per year, while total out-of-pocket expenses are expected to be $1,800 per year.
IT IS REQUESTED: Considering that investor's opportunity cost is 12% and income tax rate is 27%.
a) Determine income subject to income tax and net income for each year.
b) Based on above, determine net cash flow for each year.c) Determine if investment under study is profitable, calculating NPV and IRR.

Develop your calculations on a excel spreadsheet.

Note: Assume that useful life of fixed assets for income tax purposes is equal to their economic useful life.

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