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Investment Cash Flow Analysis and IRR

The document outlines a financial analysis for a project, including calculations for annual after-tax cash flow, net present value (NPV) at a 10% discount rate, and internal rate of return (IRR). It provides specific figures for equipment costs, depreciation, EBIT, taxes, and cash flows over a 10-year period. Additionally, it explores how changes in the discount rate and growth rate in EBIT affect the IRR.

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8 views2 pages

Investment Cash Flow Analysis and IRR

The document outlines a financial analysis for a project, including calculations for annual after-tax cash flow, net present value (NPV) at a 10% discount rate, and internal rate of return (IRR). It provides specific figures for equipment costs, depreciation, EBIT, taxes, and cash flows over a 10-year period. Additionally, it explores how changes in the discount rate and growth rate in EBIT affect the IRR.

Uploaded by

abhilashdx
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as XLSX, PDF, TXT or read online on Scribd

Chapter 7 Problem 12

a). Complete the spreadsheet below by estimating the project's annual after tax cash flow
b). What is the investment's net present value at a discount rate of 10 percent?
c). What is the investment's internal rate of return?
d). How does the internal rate of return change if the discount rate equals 20 percent?
e). How does the internal rate of return change if the growth rate in EBIT is 8 percent inste

Facts and Assumptions


Equipment initial cost $ $ 350,000
Depreciable life yrs. 7
Expected life yrs. 10
Salvage value $ $0
Straight line depreciation
EBIT in year 1 28,000
Tax rate 38%
Growth rate in EBIT 3%
Discount rate 10%

Year 0 1 2 3
Initial cost 350,000
Annual depreciation 50,000 50,000 50,000
EBIT 28,000 28,840 29,705
Taxes .38*EBIT 10,640 10,959 11,288
After tax income (350,000) 17,360 17,881 18,417
after tax cash flow=after tax $ (350,000) $ 67,360 $ 67,881 $ 68,417
Present value for each year 350,000 (61,236) (56,100) (51,403)
(350,000) 61,236 56,100 51,403

12,923
b) Net present value @ 10% $ 12,923
c) Internal rate of return 11%

d) IRR for discount 20% Remains same at 11%. It is because the rate does not have

e) The internal rate of return change if the growth rate in EBIT is 8 percent instead o
Year 0 1 2 3
Initial cost (350,000)
Annual depreciation 50,000 50,000 50,000
EBIT 28,000 30240 32659
Taxes 0.38*EBIT 10,640 11,491 12,410
After tax income (350,000) 17,360 18,749 20,249
After tax cash flow (350,000) 67,360 68,749 70,249

Internal Rate of Return 13%


Problem 12

annual after tax cash flow.


e of 10 percent?

ate equals 20 percent?


e in EBIT is 8 percent instead of 3 percent?

4 5 6 7 8 9 10

50,000 50,000 50,000 50,000


30,596 31,514 32,460 33,433 34,436 35,470 36,534
11,627 11,975 12,335 12,705 13,086 13,478 13,883
18,970 19,539 20,125 20,729 21,351 21,991 22,651
$ 68,970 $ 69,539 $ 70,125 $ 70,729 $ 21,351 $ 21,991 $ 22,651
(47,107) (43,178) (39,584) (36,295) (9,960) (9,326) (8,733)
47,107 43,178 39,584 36,295 9,960 9,326 8,733

se the rate does not have any impact on the tax cash flow.

IT is 8 percent instead of 3 percent 8%


4 5 6 7 8 9 10

50,000 50,000 50,000 50,000


35272 38094 41141 44432 47987 51826 55972
13,403 14,476 15,634 16,884 18,235 19,694 21,269
21,869 23,618 25,508 27,548 29,752 32,132 34,703
71,869 73,618 75,508 77,548 29,752 32,132 34,703

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