Novell Industries is considering the purchase of equipment, at a cost of $ 18,000, to expand the production area. They estimate that net income will be $ 4,500 the first year and will increase by $ 500 each year over a ten-year period. The expenses will be $ 300 the first year and will increase at the rate of $ 250 per year over the 10-year period. The equipment will be depreciated using the MACRS system, assuming it is a 7 year class asset. This equipment, at the end of 10 years, has no market value. Consider a 31% tax rate.

A. Build after-tax cash flow over the 10-year life of the project. You should illustrate it in a table, starting with the pre-tax cash flow and illustrating the depreciation charges, taxable income, and tax amount, as discussed in class.

B. Determine the internal rate of return after taxes.

C. Assume that the business will cease operations and the generator can be sold for $ 10,000 at the end of the fifth year. Illustrate the after-tax cash flow for the fifth year in this new scenario

D. Now assume that at the end of ten years the equipment can be sold for $ 5,000. Recalculate the cash flow for the 10th year.