Question 7.1

A company is considering investing $1.5 million in a new production system today (year 0). The new production system will result in an after-tax cost savings of $200,000 at the end of year 1. These cost savings are then expected to decline at a rate of 4% p.a. forever. Calculate the internal rate of return of the new production system. Show all calculations.

Q7.2 Question 7.2

A project is expected to cost $4 million and generate after-tax net cash flows of $200,000 at the end of year 1, $300,000 at the end of year 2, and $400,000 at the end of year 3. The after-tax net cash flow after year 3 will grow at 5% per annum forever. If the projects after-tax discount rate is 10% p.a., calculate the projects net present value. Show all calculations.

(Answer parts 7.1 and 7.2 independently of each other)