Compute the NPV (at 10 percent cost of capital) and IRR to determine the financial feasibility of this project if this were a tax-paying entity with a tax rate of 30 percent. Use the following tables.
Compute the NPV (at 10 percent cost of capital) and IRR to determine the financial feasibility of this project if this were a tax-paying entity with a tax rate of 30 percent. Use the following tables.
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:MHA Medical Center is starting a new lab test center on its third floor. The expected patient volume demands will generate $500,000 per year in revenues for the next five
years. The new center will incur operating expenses, excluding depreciation, of $300,000 per year for the next five years. The initial cost of the new equipment is $700,000.
Straight-line depreciation is used to estimate depreciation expense, and the equipment will be depreciated over a five-year life to their salvage value. The expected salvage
value of the equipment at year five is $80,000.
Compute the NPV (at 10 percent cost of capital) and IRR to determine the financial feasibility of this project if this were a tax-paying entity with a tax rate of 30 percent.
Use the following tables.
Givens:
Initial investment
Net revenue
Operating expenses
Depreciation expense
Salvage value at the end of project year
Cost of capital
Tax rate
Analysis
Initial investment
Net revenue
Operating expense
Depreciation expense
Earnings before taxes
Tax expense
Earnings after taxes
Add Depreciation expense
Net operating cash flows
Salvage value
Project cash flows
Cost of capital
Present value interest factors
Annual PV of cash flows
Sum of PV of cash flows
Net present value (NPV)
Internal rate of return (IRR) - Use excel formula
Years
Years
0
0
1
1
2
2
3
3
4
4
5
5
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