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insens350 [35]
3 years ago
6

Heap Corporation is considering an investment in a project that will have a two year life. The project will provide a 10% intern

al rate of return, and is expected to have a $40,000 cash inflow the first year and a $50,000 cash inflow in the second year. What investment is required in the project? (Ignore income taxes.) Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using the tables provided. Multiple Choice $74,340 $77,660 $81,810 $90,000
Business
1 answer:
Vlad1618 [11]3 years ago
6 0

Answer:

$77,660

Explanation:

IRR signifies the interest rate where the net present value equals zero.

In order to reverse work the investment, the present values of the cash flow from this new project - when discounted at 10% should equal the amount of investment.

IRR signifies that Initial outlay - PV Cash flows @ 10% = 0

We calculate the present values as,

PV = 40,000 * (1 / 1+0.10)     +      50,000 * [1 / ((1+0.10)^2)}

PV = $77,685.9 (rounded off)

This is closest to $77,660, which is the initial outlay required to to generate above mentioned pc vash flows and an irr of 10%.

Hope that helps.

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5 0
3 years ago
We are evaluating a project that costs $644,000, has an eight-year life, and has no salvage value. Assume that depreciation is s
AleksandrR [38]

Solution :

a).

Particulars                                                Details

Selling price per unit                                 37

Less : variable cost per unit                     -21

Margin per unit                                           16

No. of units sold per unit                       70,000

Gross margin                                        11,20,000

Less : fixed cost                                     - 7,25,000

Profit before depreciation and tax       3,95,000

Less : depreciation                                -80,500

Profit before tax                                     3,14,500

Less : Tax                                               -1,10,075

Net profit per year                                 2,04,425

Project Cost                                           6,44,000

Accounting breakeven point in years     3.15

b).

Calculating the base Cash - Cash flow and NPV

Particulars                                                       Amount

Net profit per year                                        2,04,425

Add : depreciation                                         80,500

Base Cash cashflow                                     2,84,925

Required rate of return                                    15%

Present value of base cash cash flow        12,78,550

received in 8 years.

Project cost                                                  -6,44,000

NPV                                                               6,34,550

The present value of base cash cash flow received in 8 years is calculated as Present value of annuity received at the end of each year $ 2,84,925 at the rate of interest 15% for a period of 8 years.

The sensitivity of the NPV to 500 units decrease in projected sales :

Particulars                                                          Details

Selling price per unit                                            37

Less : variable cost per unit                                -21

Margin per unit                                                     16

Number of units sold per year                          69,500

Gross margin                                                      11,12,000

Less : fixed cost                                                -7,25,000

Profit before depreciation and tax                   3,87,000

Less : depreciation                                            -80,500

Profit before tax                                                 3,06,500

Less : tax                                                            -1,07,275

Net profit per year                                             1,99,225

Add : depreciation                                              80,500

Base Cash cashflow                                          2,79,725

Required rate of return                                         15%

Present value of base cash cash flow              12,55,216

received in 8 years.

Project cost                                                    -6,44,000

NPV                                                                6,11,216

Original NPV                                                  6,34,550

Sensitive NPV                                                  -23,334

c).

Particulars                                                              Details

Selling price per unit                                               37

Less : variable cost per unit                                   -20

Margin per unit                                                        17

No. of units sold per year                                     70,000

Gross Margin                                                         11,90,000

Less : fixed cost                                                     -7,25,000

Profit before depreciation and tax                       4,65,000

Less : Depreciation                                                -80,500

Profit before tax                                                     3,84,500

Less : tax                                                                -1,34,575

Net profit per year                                                  2,49925

Add : depreciation                                                   80,500

Operating cash flow                                               3,30,425

Original operating cashflow                                   2,84,925

Sensitivity of OCF                                                      45,500

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