Question
QUESTION 14 The following table presents the initial cash outlay and cash flow projections for a new line of digital cameras that DigiCam is evaluating:
QUESTION 14 The following table presents the initial cash outlay and cash flow projections for a new line of digital cameras that DigiCam is evaluating: Year Cash inflow / outflow Amount of cash flow 0 Initial cash outlay for buying plant and equipment (at the beginning of Year 1) $2,350,000 1 Net operating pretax cash inflows $1,000,000 2 Net operating pretax cash inflows $1,200,000 3 Net operating pretax cash inflows $1,300,000 3 Salvage value (at the end of Year 3) $250,000 The company uses a discount rate of 10% for evaluating capital projects. The corporate tax rate is 30%. Assume that DigiCam will depreciate the plant and equipment over three years on a straight-line basis using $250,000 as the estimated salvage value. Also assume that the initial cash outlay occurs at the beginning of year 1 and all other cash flows occur at the end of the respective years.
Required:
a) Calculate the NPV of the project
b) Calculate the Payback period for the project
c) Calculate the IRR of the project (Hint: IRR lies between 18 and 20%)
Use the following present value table to solve this problem:
Periods | 2% | 4% | 6% | 8% | 10% | 12% | 14% | 16% | 18% | 20% |
1 | 0.980 | 0.962 | 0.943 | 0.926 | 0.909 | 0.893 | 0.877 | 0.862 | 0.847 | 0.833 |
2 | 0.961 | 0.925 | 0.890 | 0.857 | 0.826 | 0.797 | 0.769 | 0.743 | 0.718 | 0.694 |
3 | 0.942 | 0.889 | 0.840 | 0.794 | 0.751 | 0.712 | 0.675 | 0.641 | 0.609 | 0.579 |
4 | 0.924 | 0.855 | 0.792 | 0.735 | 0.683 | 0.636 | 0.592 | 0.552 | 0.516 | 0.482 |
5 | 0.906 | 0.822 | 0.747 | 0.681 | 0.621 | 0.567 | 0.519 | 0.476 | 0.437 | 0.402 |
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