Question
You are the CFO of a business and have the opportunity to evaluate two different investment opportunities. Information related to these investments follows: Investment 1
You are the CFO of a business and have the opportunity to evaluate two different investment opportunities. Information related to these investments follows:
| Investment 1 | Investment 2 |
Investment Cost | $ 800,000 | $ 600,000 |
Salvage Value | $ 40,000 | $ 100,000 |
Useful Life | 10 years | 20 years |
Annual Depreciation | $ 76,000 | $ 25,000 |
|
|
|
|
|
|
| Investment 1 | Investment 2 |
Pre-Tax CASH FLOW | $ 120,000 | $ 90,000 |
Your company has a required rate of return of 10% for all new investments and is subject to a tax rate of 30%.
1)Determine the after tax cash flow for each investment.
2)Calculate the Net Present Value for each investment using the after tax cash flow you calculated in part 1.
3)IGNORING THE SALVAGE VALUE, (use only the annuity to determine the IRR), calculate the Internal Rate of Return for each investment using the after tax cash flow you calculated in part 1.
4)Calculate the Payback Period for each investment using the after tax cash flow you calculated in part 1.
5)Recalculate the Net Present Value for INVESTMENT #1 ONLY using the after tax cash flow you calculated in part 1 and assume that the required/target rate of return is 6%, 12%, and 20%.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started