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 4 5 6 7 8 9 10

Initial cost 350,000

Annual depreciation 50,000 50,000 50,000 50,000 50,000 50,000 50,000

EBIT 28,000 28,840 29,705 30,596 31,514 32,460 33,433 34,436 35,470 36,534

Net present value @ 10%

Internal rate of return

Capital Project Evaluation Given the following information about this new product investment is to:

1. Identify the relevant cash flows 2. Calculate the investment's net present value and internal rate of return 3. Calculate the change in the internal rate of return if the growth rate in EBIT is 8% instead of 3%?