12.i. Operating cash Flow = (Revenues - Expenses - Depreciation ) * (1 - Tax) + Depreciation
Operating cash Flow = (250000 - 125000 - 400000 / 4 ) * (1 - 0.34) + 400000/4
Operating cash Flow = (250000 - 125000 - 100000 ) * (1 - 0.34) + 100000
Operating cash Flow = 25000 * 0.66 + 100000
Operating cash Flow = 116500 Option E
12.ii. NPV = - Initial Investment + Cash Flow Year 1 / (1 + r) + Cash Flow Year 2 / (1 + r)^2 + Cash Flow Year 3 / (1 + r)^3 + Cash Flow Year 4 / (1 + r)^4
NPV = - 400000 + 116500 / (1 + 0.17) + 116500 / (1 + 0.17)^2 + 116500 / (1 + 0.17)^3 + 116500 / (1 + 0.17)^4
NPV = - 400000 + 99572.60 + 85104.80 + 72739.20 + 62170.20
NPV = - 80410 Option B
12.iii. IRR
NPV at 5%
NPV = - 400000 + 116500 / (1 + 0.05) + 116500 / (1 + 0.05)^2 + 116500 / (1 + 0.05)^3 + 116500 / (1 + 0.05)^4
NPV = - 400000 + 110952 + 105669 + 100637 + 95844
NPV = $13103
Using Interpolation Method
IRR = 5% + [$13103 / (13103 + 80410)] * 12%
IRR = 6.40% Approx. Option D
13. After Tax Cost of Debt = Before Tax Cost * (1 - Tax)
After Tax Cost of Debt = 9% * (1 - 0.40)
After Tax Cost of Debt = 5.40% Option C
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