Class time TTH 9 NPV 55 points Your company is undertaking a

Class time: TTH 9 NPV (55 points) Your company is undertaking a new project. A building was purchased 10 years ago for value) over 30 years. It is now worth $200,000. S650,000 depreciated straight line to $50,000 (ie, the land The project requires improvements to the building of $100,000. The improvements are depreciated straight line to zero over the life of the proiest The project will generate revenues of $225,000, $250,000, $275,000 and $300,000 for years 1-4, respectively. Annual cash operating expenses are $100,000, $110,000, $130,000 and $150,000, respectively The project will last 4 years, at which time the building will be sold for book value. Taxes are 40% and rate of return is 10%. co al depreciation on the building and inprovements s points) b. Show projected annual income statements for years 1,2,3,4. (5 points)

Solution

g.

Payback Period

Cash inflows of project

Less:OperatingExpenses

Payback Period will be:

2 Years+ ($25,000/95,000)*12 = 2 years 3.15 months

h.

Discounted Payback Period

Net Present Value (NPV) of project = Present Value of Cash Inflows - Present Value of Cash Outflows

= $289,718 - $200,000

= $89,718

Years	1	2	3	4
Revenue($)	225,000	250,000	275,000	300,000
Less:OperatingExpenses	(100,000)	(110,000)	(130,000)	(150,000)
Cash flow before Depriciation and Tax($)	125,000	140,000	145,000	150,000
Less: Depriciation($)	(20,000)	(20,000)	(20,000)	(20,000)
Inflow before tax($)	105,000	120,000	125,000	130,000
Less: Tax($)	(42,000)	(48,000)	(50,000)	52,000
Earnings after tax($)	63,000	72,000	75,000	78,000
Add: Depriciation($)	20,000	20,000	20,000	20,000
Net cash inflows($)	83,000	92,000	95,000	98,000