Question

Marge's Campground is considering adding a miniature golf course to its facility. The course she wants would cost $30,000, would be depreciated on a straight line basis over the 4-year life of the course, and would have zero salvage value. Marge estimates the income from the golf fees would be $28,000 a year with $10,000 of that amount being variable cost. The fixed cost would be $5,000. Marge feels that the course would net her, after costs, an additional $10,000 in revenue from her existing facilities. The project will require $1,000 of net working capital which is recoverable at the end of the project. What is the internal rate of return on this project at a tax rate of 34 percent? a. 66.76 percent b. 44.35 percent c. 26.18 percent d. 21.19 percent e. 24.50 percent

Answer 1

Option B

WORKINGS

Operating cash flows

Year	NetIncome from golf fees	Variable cost	Fixed cost	Additionalrevenue	Depreciation	Profit before tax	Tax	Profit after tax	OCF
1	28000	-10000	-5000	10000	-7500	15500	-5270	10230	17730
2	28000	-10000	-5000	10000	-7500	15500	-5270	10230	17730
3	28000	-10000	-5000	10000	-7500	15500	-5270	10230	17730
4	28000	-10000	-5000	10000	-7500	15500	-5270	10230	17730

Net Cash flows

Year	Initialcost	Working capital	OCF	Net cash flow
0	-30000	-1000		-31000
1			17730	17730
2			17730	17730
3			17730	17730
4		1000	17730	18730

IRR is computed using Excel IRR function

Book1- Excel X AutoSave ( Off Sign in Tell me what you want to do File Formulas Review View Help Share Home Insert Draw Page Layout Data A A Calibri Wrap Text 11 Percentage Conditional Format as Cell Formatting BIU Insert Delete Format Sort & Find & Paste A Merge & Center $% Filter Select Table Styles Clipboard Alignment Number Styles Cell Editing Font =IRR(F2:F6) 13 A C E G B HI K Year Initialcost Working capital OCF Net cash flow SUM(C2:E2) -SUM (C3: E3 ) 2 C -30000 -1000 - K10 = K11 =IRR(F2:F6) 3 1 IRR SUM(C4:E4) =SUM(C5:E5) |=SUM(C6: E6) 4 7 = K12 5 K13 6 4 1000 7 Year Netlncome from golf fees Variable cost Fixed cost Additionalrevenue Depreciation Profit before tax Tax Profit after tax OCF 9 -SUM(C10:G10) -H10* 34 % H10+l 10 =SUM(C11:G11) =-H11*349% = H11 + l 1 1 SUM(C12:G12) -H12*34 % =H12+l 12 SUM(C13:G13)-H13*34 % =H13+113 =-30000/4 10 1 28000 -10000 -5000 10000 J10-G10 -30000/4 11 -5000 2 28000 -10000 10000 EJ11-G11 --30000/4 12 -5000 3 28000 10000 10000 J12-G12 -30000/4 13 28000 -10000 -5000 10000 J13-G13 14 15 16 17 Sheet1 +1009% Ready P & S wa ENG 10:37 PM