Problem 10.33 Comprehensive

Problem 10.33 Comprehensive Skywards Inc., an airline caterer, is purchasing refrigerated trucks at a total cost of $3.25 million. After-tax net income from this investment is expected to be $750,000 for the next five years. Annual depreciation expense was $650,000. The company's cost of capital is 17 percent. Hint: Using the information given in the problem, compute the cash flows for each year of the project's life. Cost: $3,250,000 Project Life (years): 5 Discount Rate: 17.00% Year Net Income Depreciation Project Cash Flows 0 -$3,250,000 1 $750,000 $1,400,000 2 $750,000 $1,400,000 3 $750,000 $1,400,000 4 $750,000 $1,400,000 5 $750,000 $1,400,000 a. What is the discounted payback period? Hint: Calculate the cumulative present value cash flow for each year of the project's life. using "IF" statements to compute the project's discounted payback period. Project PVCF @ Cumulative Year Cash Flows 17.00% PVCF 0 -$3,250,000 -$3,250,000 -$3,250,000 1 $1,400,000 $1,196,581 -$2,053,419 2 $1,400,000 $1,022,719 -$1,030,700 3 $1,400,000 $874,119 -$156,581 4 $1,400,000 $747,110 $590,529 5 $1,400,000 $638,556 $1,229,085 Discounted Payback Period: 3.2096 years b. What is the NPV on this investment? Hint: Calculate the net present value using an equation and then use the NPV function, NPV(rate,value1,value2, ...), to compute the net present value of the project. NPV (Equation): $1,229,085.00 NPV (Excel Function): $1,229,085.00 c. Calculate the IRR. Hint: Use the IRR function, IRR(values,guess), to compute the internal rate of return of the project. IRR: 32.55%