Question
GreenTree Inc. is considering investing $100,000 on tree cutting equipment. The equipment is expected to last 5 years. The company expects revenues of $100,000 per
GreenTree Inc. is considering investing $100,000 on tree cutting equipment. The equipment is expected to last 5 years. The company expects revenues of $100,000 per year for 5 years. Expenses are forecast at 50% of revenue. In addition to the investment in the equipment the company will have to invest $10,000 in working capital at the start of the project. All investments in working capital will be recovered at the end of the project, i.e., at the end of 5 years. The equipment will be depreciated on a straight line basis for 5 years. The tax rate is 40%. The cost of capital is 20%.
1. What are the operating cashflows in each if the next 5 years? 2. Should GreenTree invest in the project if it uses the NPV method? 3. What is the IRR of the project? Should GreenTree invest in the equipment using the IRR method? 4. What is the discounted payback period of the project?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started