Review Question El Dorado Limited This company convened a meeting of its managers and informed them of an opportunity for investment in Lala land . The management accounting department was asked to study and recommend whether this investment is going to be profitable or not . They provide them with the following details: TABLE 1 Capital Expenditure involved $70000 Maturity period iof the project 4 yrs Revenue $18000 Salary expense $5000 Lease expense annually $3500 Supplies expense $1500 Maintenance expense $900 Utilities $1200 Cost of capital 10% Salvage value 34000 Tax rate 25% The company will need to spend $6200 on net working capital but this sum will be returned at the end of the period. The estimated sale of the capital asset at the end of the project will be $20000. The company can sublet part of the facilities for $2000 yearly during the project . The capital expenditure is depreciated using straight line method . REQUIRED Calculate the initial investment Calculate each year cash flow after tax Calculate the terminal value of the project including the ATCF
Review Question El Dorado Limited This company convened a meeting of its managers and informed them of an opportunity for investment in Lala land . The management accounting department was asked to study and recommend whether this investment is going to be profitable or not . They provide them with the following details: TABLE 1 Capital Expenditure involved $70000 Maturity period iof the project 4 yrs Revenue $18000 Salary expense $5000 Lease expense annually $3500 Supplies expense $1500 Maintenance expense $900 Utilities $1200 Cost of capital 10% Salvage value 34000 Tax rate 25% The company will need to spend $6200 on net working capital but this sum will be returned at the end of the period. The estimated sale of the capital asset at the end of the project will be $20000. The company can sublet part of the facilities for $2000 yearly during the project . The capital expenditure is depreciated using straight line method . REQUIRED Calculate the initial investment Calculate each year cash flow after tax Calculate the terminal value of the project including the ATCF
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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Review Question
El Dorado Limited
This company convened a meeting of its managers and informed them of an opportunity for investment in Lala land . The
TABLE 1
|
Capital Expenditure involved |
$70000 |
|
Maturity period iof the project |
4 yrs |
|
Revenue |
$18000 |
|
Salary expense |
$5000 |
|
Lease expense annually |
$3500 |
|
Supplies expense |
$1500 |
|
Maintenance expense |
$900 |
|
Utilities |
$1200 |
|
Cost of capital |
10% |
|
Salvage value |
34000 |
|
Tax rate |
25% |
The company will need to spend $6200 on net working capital but this sum will be returned at the end of the period. The estimated sale of the capital asset at the end of the project will be $20000. The company can sublet part of the facilities for $2000 yearly during the project . The capital expenditure is
REQUIRED
- Calculate the initial investment
- Calculate each year cash flow after tax
- Calculate the terminal value of the project including the ATCF
- Calculate the
NPV - Calculate the Profitability Index [PI]
- Find the
IRR of the project
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