Question
1. Turner Video will invest $98,500 in a project. The firms cost of capital is 6 percent. The investment will provide the following inflows. Use
1. Turner Video will invest $98,500 in a project. The firms cost of capital is 6 percent. The investment will provide the following inflows. Use Appendix A for an approximate answer but calculate your final answer using the formula and financial calculator methods.
Year | Inflow | ||
1 | $ | 35,000 | |
2 | 37,000 | ||
3 | 28,000 | ||
4 | 41,000 | ||
5 | 42,000 | ||
|
The internal rate of return is 8 percent.
a. If the reinvestment assumption of the net present value method is used, what will be the total value of the inflows after five years? (Assume the inflows come at the end of each year.) (Do not round intermediate calculations and round your answer to 2 decimal places.)
b. If the reinvestment assumption of the internal rate of return method is used, what will be the total value of the inflows after five years? (Use the given internal rate of return. Do not round intermediate calculations and round your answer to 2 decimal places.)
c. Which investment assumption is better?
Reinvestment assumption of IRR | |
Reinvestment assumption of NPV |
2. Assume a firm has earnings before depreciation and taxes of $530,000 and no depreciation. It is in a 40 percent tax bracket.
a. Compute its cash flow.
b. Assume it has $530,000 in depreciation. Recompute its cash flow.
c. How large a cash flow benefit did the depreciation provide?
PLEASE SHOW ALL WORK
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