Question
A project proposal has the following estimated cash flows: Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Initial
A project proposal has the following estimated cash flows:
| Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Year 6 | |
| Initial outlay | $ 800,000 | ||||||
| Sales | $440,000 | $490,000 | $540,000 | $590,000 | $425,000 | $350,000 | |
| Variable cash expenses | $132,000 | $147,000 | $162,000 | $177,000 | $127,500 | $105,500 | |
| Fixed cash expenses | $85,000 | $95,000 | $105,000 | $115,000 | $125,000 | $135,000 | |
| Taxes | $66,900 | $74,400 | $81,900 | $89,400 | $51,750 | $33,000 | |
| After tax disposition value (positive) | $325,000 |
Some of these cash flows are positive and some are negative. Use what you know about the nature of sales, expenses, and taxes to determine if they are positive or negative. After doing so:
a. Using a 7% cost of money, please calculate the net present value and explain what this number means.
b. Please calculate the profitability index (with two additional decimal places) and explain what this number means.
c. Please calculate the internal rate of return and explain what this number means (as a percentage with two additional decimal places).
d. Please calculate the payback period (in years with two additional decimal places) and explain what this number means.
e. Using the same 7% cost of money, please calculate the present value payback period (in years with two additional decimal places) and explain what this number means.
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Income Tax Fundamentals 2013
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill
31st Edition
1111972516, 978-1285586618, 1285586611, 978-1285613109, 978-1111972516
