The firm is projecting the cash flows in the chart below for the asset above. Find the marginal operating cash flows for this asset. Year 0 1 2 3 Revenues 138,000 Revenue Inflation Rate 9.00% 9.00% Expenses 44,000 Expense Inflation Rate 5.00% 5.00% Useful life 3 Operating Cash Flows, Old Asset 47,000 47,000 47,000 At the end of Year 3, the asset purchased in Year 0 will be sold for $20,000. Find the terminal cash flow. What is this project's IRR? If the firm's cost of capital is 11%, should the firm invest in this asset? Justify your answer. 1 2 Capital gains tax rate 3 Income tax rate 4 st PROBLEM 1 A B C D E F 0.15 0.30 5 6 Inputs 7 Cost of New Asset 125,000.00 8 Installation Costs 0.00 9 Old Asset 10 Book Value 0.00 11 Proceeds on Sale 32,000.00 12 Initial Purchase Price 100,000.00 13 Decrease in Working Capital 7,000.00 14 15 Outputs Distribution Tax Effects 16 Book Value 0.00 17 Capital Gain 32,000.00 4,800.00 18 Capital Loss 19 Recaptured Depreciation 20 Proceeds on Sale 32,000.00 21 22 Cost of New Asset 125,000.00 23 Installation Costs 0.00 24 Proceeds on Sale, Old Asset 32,000.00 25 Taxes on Proceeds on Sale 4,800.00 26 Decrease in Working Capital 7,000.00 27 Net Cash Outlay 90,800.00 28 29 PROBLEM 2 0 30 Inputs 31 Revenues 32 Revenue Inflation Rate 33 Expenses 34 Expense Inflation Rate 2 3 138,000.00 0.09 0.09 44,000.00 0.05 0.05 35 Cost of New Asset 36 Useful life 3.00 37 Operating Cash Flows, Old Asset 47,000.00 47,000.00 47,000.00