Question

Calculate NPV & IRR using the following information:

. Purchase Price:   Estimated purchase price for the new equipment is $150 million.

. Company’s Depreciation Policy: Depreciation using Straight-line method, the economic life is 5 years.

-   Equipment expected to have zero salvage value at the end of year 5.   At that time the equipment will be obsolete and sold for scrap.

. Cash Inflows: Project inflows are expected to be $65 million per year, beginning one year after installation of the new equipment is complete.

. Cash Outflows: The new equipment will have extra cash outflows of $10 million per year beginning one year from today.

. Tax Rate: The company’s estimated tax rate is 30%.

Find the net present value (NPV) and (IRR) using the information in the "Project Scope" tab.
Use the cells below to show your work.
			Calculate NPV & IRR			Calculate Cash Flow
	Rate of Return					Inflow
	Yr 0					Outflow
	Yr 1					Depreciation
	Yr 2
	Yr 3					Tax (1-.30)
	Yr 4					Depreciation
	Yr 5					Cash Flow
	NPV
	IRR

Answer 1

	Yr 0	Yr 1	Yr 2	Yr 3	Yr 4	Yr 5
Inflow (given)		65	65	65	65	65
Outflow (given)		10	10	10	10	10
Depreciation (Purchase price/Economic life= 150/5=30)		30	30	30	30	30
Income before tax (Inflow-outflow-depreciation)		25	25	25	25	25
Tax (0.3*Income before tax)		7.5	7.5	7.5	7.5	7.5
Depreciation (Adding back depreciation as its non cash expense)		30	30	30	30	30
Annual Cash Flow(Income before tax-Tax expense+Depreciation)		47.5	47.5	47.5	47.5	47.5
Initial Investment (given)	150
Total Net Cashflows	-150	47.5	47.5	47.5	47.5	47.5
Rate of Return (assumed or given)	10%	15%	20%
NPV (Using excel NPV formula with particular rate of return using annual cash flow from Yr 1 to 5 and then subtracting initial investment)	30.06	9.23	-7.95
IRR (Using excel IRR formula with Total net cashflows from Yr 0 to 5)	18%