Managerial Accounting Final Exam Page 8 of 12 6. Ryan Company is considering whether to invest in a piece of equipment that has a cost of $500,000 today. The equipment will provide net before-tax operating cash inflows of $120,000 at the end of each year for eight years. The equipment will have a salvage value of $0 at the end of eight years. . In order to use the equipment and sell the output, Ryan Company will need to increase working capital by $100,000. Ryan Company uses straight-line depreciation for income tax purposes. The income tax rate is 40%. Income taxes are paid at the end of the year. a. Calculate the amount of total AFTER-TAX cash flows that will occur at each of the following times. Clearly indicate whether the total amount is a cash INFLOW or a cash OUTFLOW. Note that you are not being asked to compute the present value of the cash flows; you only need to compute the total after-tax cash flow itself. Total AFTER-TAX cash flow RIGHT NOW (the beginning of the project) Total AFTER-TAX cash flow AT THE END OF YEAR 2 Note: This is JUST for Year 2; this is NOT the sum of cash flows at the end of Year 1 and Year 2. Also, don't forget the impact of income taxes on the after-tax cash flow. Finally, don't forget the deprecation tax shield. Total AFTER-TAX cash flow AT THE END OF YEAR 8 (the final year) Note: Careful; there are several cash flows at the end of Year 8, the final year. b. If the required rate of return on this equipment is 13%, then the Net Present Value of the equipment is negative 96,904. Which ONE of the following is your best estimate of the INTERNAL RATE OF RETURN on this equipment? a. negative 14% b. 0% C . positive 16% positive 13% positive 8% Note: You do NOT need to do an exact calculation to answer this question. Instead, you should think about the conceptual definition of Internal Rate of Return