Question

An entrepreneur has to decide whether to invest in a project or not. He is provided with the following information:

The cost of the capital expenditure involved is $40000

Discount rate of the project is 11%,

He will have to spend $7500 on net working capital that will be returned to him at the end of the project

He will depreciate his capital expenditure using straight line method over the project life.

The duration of the project is 4 years.

Tax rate of the project is 20%

His accountant has forecast a revenue of $18000 annually

His annual expenses are given in the table below:

Supplies expense

$800

Salary expenses

$1400

Utilities

$ 650

Rental expenses

$720

At the end of the project he will sell the equipment purchased initially [CAPEX] at 8500

The salvage value of CAPEX is $5000

REQUIRED

a)Calculate the initial investment

b)Calculate each year cash flow

c)Calculate the terminal value of the asset used

d)Calculate the NPV

e)Calculate the Profitability Index [PI]

f) Calculate IRR of the project