Question

Question 2 An entrepreneur has to decide whether to invest in a project or not. He is provided with the following information: • The cost of the capital expenditure involved is $40000 • He will have to spend $7500 on net working capital that will be returned to him at the end of the project • He will depreciate his capital expenditure using straight line method over the project life. • The duration of the project is 4 years. • Tax rate of the project is 20% • His accountant has forecast a revenue of $18000 annually • His annual expenses are given in the table below: Supplies expense $900 Salary expenses $1400 Utilities $ 650 Rental expenses $720 • At the end of the project he will sell the equipment purchased initially (Capex) at 7000 • The salvage value of capex is $5000 REQUIRED 1. Calculate the Internal rate of return (IRR] 2. If the discount rate of the project is 9%, should he accept the project

Answer 1

AK ALI AO AP AQ AN I Computation of IRR 1 0 -40,000.00 2 3 4 7,000.00 -400.00 -7,500.00 Year Initial Investment $ Sale Value at End Tax on Excess of Salvage Value Net Working capital $ Recovery of NWC Annual revenue Annual Expenses Depreciation Net Operating profit Tax @ 20% Add depreciation Net Cash Flow $ IRR 18,000.00 $ -3,670.00 $ -8.750.00 $ 5,580.00 $ -1,171.80 $ 8,750.00 $ 13,158.20 $ 18,000.00 $ -3,670.00 $ -8,750.00 $ 5,580.00 $ -1,171.80 $ 8,750.00 $ 13,158.20 $ os ollos $ 18,000.00 $ -3,670.00 $ -8,750.00 $ 5,580.00 $ -1,171.80 $ 8,750.00 $ 13,158.20 $ 7,500.00 18,000.00 -3,670.00 -8,750.00 5,580.00 -1,171.80 8,750.00 19,758.20 $ A 14 15 16 47,500.00 $ 8.82% |

AK AL Year Initial Investment Sale Value at End Tax on Excess of Salvage Value Net Working capital Recovery of NWC Annual revenue Annual Expenses Depreciation Net Operating profit Tax @ 20% Add depreciation Net Cash Flow IRR AM AN AO AP AQ Computation of IRR 12 3 4 -40000 7000 =-(7000-5000)*0.2 -7500 7500 18000 18000 18000 18000 -3670 -3670 -3670 -3670 =-(40000-5000)/4 =-(40000-5000)/4 =-(40000-5000)/4 =-(40000-5000)/4 =SUM(AN8:AN10) =SUM(A08:A010) =SUM(AP8:AP10) =SUM(AQ8:AQ10) =-AN11*0.21 =-A011*0.21 =-AP11*0.21 =-AQ11*0.21 =-AN10 =-A010 =-AP10 =-AQ10 FESUM(AM3:AM6) EAN11+AN12+AN13 =A011+A012+A013 =AP11+AP12+AP13 =AQ11+AQ12+AQ13+AQ4+AQ5 | =IRR(AM14:AQ14)

2. as the Discount rate is 9% which is greater than IRR, the project will result in negative NPV thus the project should not be accepted