An investment project will involve spending $270,000 at the beginning of the project and $450,000 at the beginning of year two. These investments will generate gross revenues of $310,000 at the end of year two and $560,000 at the end of each year three through nine. These revenues will attract a royalty payment of 12%. Operating costs of $180,000 at the end of year two and $220,000 at the end of each year three through nine will also be incurred. a. Calculate the projecť's before-tax cash flow. Use a table to assist with your calculations. b. Assuming a company tax rate of 30%, calculate the project's after-tax cash flow c. For a minimum rate of return of 18%, calculate the net present value (NPV), the present value ratio (PVR), and the benefit-cost (B-C) ratio to determine if the project is economically satisfactory.
An investment project will involve spending $270,000 at the beginning of the project and $450,000 at the beginning of year two. These investments will generate gross revenues of $310,000 at the end of year two and $560,000 at the end of each year three through nine. These revenues will attract a royalty payment of 12%. Operating costs of $180,000 at the end of year two and $220,000 at the end of each year three through nine will also be incurred. a. Calculate the projecť's before-tax cash flow. Use a table to assist with your calculations. b. Assuming a company tax rate of 30%, calculate the project's after-tax cash flow c. For a minimum rate of return of 18%, calculate the net present value (NPV), the present value ratio (PVR), and the benefit-cost (B-C) ratio to determine if the project is economically satisfactory.
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:An investment project will involve spending $270,000 at the beginning of the project
and $450,000 at the beginning of year two. These investments will generate gross
revenues of $310,000 at the end of year two and $560,000 at the end of each year
three through nine. These revenues will attract a royalty payment of 12%. Operating
costs of $180,000 at the end of year two and $220,000 at the end of each year three
through nine will also be incurred.
a. Calculate the project's before-tax cash flow. Use a table to assist with your
calculations.
b. Assuming a company tax rate of 30%, calculate the project's after-tax cash
flow
c. For a minimum rate of return of 18%, calculate the net present value (NPV),
the present value ratio (PVR), and the benefit-cost (B-C) ratio to determine if
the project is economically satisfactory.
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