Review Question

El Dorado Limited

This company convened a meeting of its managers and informed them of an opportunity for investment in Lala land . The management accounting department was asked to study and recommend whether this investment is going to be profitable or not . They provide them with the following details:

TABLE 1

Capital Expenditure involved	$70000
Maturity period iof the project	4 yrs
Revenue	$18000
Salary expense	$5000
Lease expense annually	$3500
Supplies expense	$1500
Maintenance expense	$900
Utilities	$1200
Cost of capital	10%
Salvage value	34000
Tax rate	25%

The company will need to spend $6200 on net working capital but this sum will be returned at the end of the period. The estimated sale of the capital asset at the end of the project will be $20000. The company can sublet part of the facilities for $2000 yearly during the project . The capital expenditure is depreciated using straight line method .

REQUIRED

1. Calculate the initial investment

2. Calculate each year cash flow after tax

3. Calculate the terminal value of the project including the ATCF

4. Calculate the NPV

5. Calculate the Profitability Index [PI]

6. Find the IRR of the project