Question
Mark is analysing several capital budgeting projects. The first one requires investing $425,000 in fixed capital that provides operating income after taxes of $14,325. The
Mark is analysing several capital budgeting projects. The first one requires investing $425,000 in fixed capital that provides operating income after taxes of $14,325. The project is depreciated using straight line method with annual amount of $27,500 for the next four years. The project will be sold $637,500 and capital gain taxes is 25% payable based on any excess of the selling price over book value. Mark argues that the terminal selling price is enough to provide 10% internal rate of return.
Mark identifies a second project with the following information:
- Investment payment amounts to $5.25 million immediately and $450,000 at the end of the first year.
- The after-tax cash flow from operation $0.95 million at the end of the first year and $3.1 million for the end of years two, three, four and five. The required rate of return on the project is 15%.
Question 1: Is marks claim about the terminal price for project one correct with regard to the internal rate of return (IRR)? If not, then determine the terminal price that yields 10%.
Question 2: What is the NPV of the second project? Do you recommend accepting the project and why?
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