Question

1.Epiphany Industries is considering a new capital budgeting project that will last for two years. The revenue for the first year is 200,000 and revenues grow at an annual rate of 10%. The cost of goods sold is 50% of the revenue. The capital expenditure is 120,000. The tax rate is 35%. Epiphany plans on using a cost of capital of 12% to evaluate this project. The depreciation is straight-line depreciation. Please fill in the following blanks: 15 points (3 points each)

Time (the end of the year)	0	1	2
Free Cash Flow	(        )	(        )	(         )
NPV = (        )
IRR = (        )

FCF at time period 2 _____ rounded to the nearest $1

Answer 1

» Fct in year o = -(Capital Expenditure) a S = - 120,000 FCF in year 1 = (Revenue-cous) (1-tox) C + Depreciation & tax rate= oo -50% of 200,000) X 0.65 + 120000 x 0.35 = $ 86,000 FCF in year 2 = (200,000 X 1/-50% of 200,000 X1: 1) X 0.65 + 120000 x 0.35 = $ 92,500 HNPU PV of Cash inflow - Trustment 86000 + 99500 - 120,000 - 7.18% 71.1212 = $ 30,526.15 Y IRR is the rate at which NPV = 0 lieg PU of Cash inflows = Initial Investment = 86000 99500 = 120,000 148 1+ 2 Using TRR Calculator, we get rieg IRR = 30.66%