Capital Budgeting Growing Costs (20 Points) L Corp has an old Cadillac used only for business purposes and would like to replace it with a new Maserati. The old car was bought 10 years ago and at that point in time was expected last for 20 years (if it didnt fall apart). $500 was spent looking for the car and to have it checked. The new car would cost $100,000. The old car cost $40,000 and had been expected to have a salvage value of $0 (zero) in twenty years. The new car is expected to last for 10 years at which point it would be sold for $50,000. The old car could be currently sold for $3,000. L Corp also has other cars for the same purpose in the same asset pool. The cars fall in an asset class with an annual 5% depreciation or CCA rate. Due to its increased speed and presence (customers would be allowed to ride it for a few minutes), L Corp would be able to secure more contracts and increase annual pretax revenues by $30,000. There would be an additional cost of $10,000 incurred annually to maintain the car and this cost would increase by 2% each year. We assume there are no changes in working capital required. The weighted average cost of capital is 12% and the tax rate is 40%. Determine the NPV for this opportunity. All working steps must be clearly shown in your calculation of NPV by hand (with a calculator). Adjust the formulas in the Excel spreadsheet Use Solver or GoalSeek to get IRR-lecture 5 6 (please download from eclass) to calculate a growing annuity of costs. Then input the numbers into the Excel spreadsheet and check your NPV calculation. a. Write down the changes you made to the Excel spreadsheet in writing in order to calculate the NPV. (It is very important to know what changes to make to the Excel spreadsheet to solve a particular NPV problem). b. Print out the page in pdf which shows the NPV calculated by Excel. You must submit this page. c. Now use Solver to find the IRR. Print out the page in pdf which shows the IRR calculated by Goalseek or Solver. You must submit this page.

"Use solver or goalseek to get IRR-lecture 5 6" is attached below.

Ch 10 (page 281)
Q34 - Cost Cutting Proposal
Tax Rate - Tc	35%			Initial Investment - I	$ 560,000
CCA Rate - d	20%			Initial Inventory Cost	$ 20,000
Discount Rate - k	9.0000%			Annual Inventory Cost	$ 3,000
Project Life - n	4	yrs		Salvage Value - S	$ 80,000
				Annual Pre-tax savings	$ 210,000
Initial outlay	$ (580,000)
PV of annual inventory Cost	$ (9,719.16)
PV of annual after-tax savings	$ 442,221.76
PV of CCATS	$ 115,911.97
PV of inventory recovery	$ 22,669.61
PV of Salvage	$ 56,674.02
NPV	$ 47,758.19