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	$ 500,000
Salvage Value	$ 40,000	$ 50,000
Useful Life	8 years	15 years
Required Rate of Return	10%	10%
Sales	$ 450,000	$ 400,000
Variable Costs	$ 150,000	$ 175,000
Fixed Costs (excluding depreciation)	$ 100,000	$ 150,000
Tax Rate	35%	35%

Your company has a required rate of return of 10% for all new investments and is subject to a tax rate of 35%.

Determine the annual after tax cash flow for each investment. In addition, determine the after-tax cash flow for the salvage value if you assume that the actual market value of Investment #1 at the end of eight years is $50,000 and the actual market value of Investment #2 at the end of fifteen years is $40,000.

Prepare a schedule of expected cash flows for each investment. Note that all positive cash flows must be shown as positive numbers and all negative cash flows must be shown as negative numbers.

Calculate the Net Present Value for each investment using the NPV function in Excel.

Calculate the Internal Rate of Return for each investment using the IRR function in Excel. (Note your guess for the interest rate in the formula should be the required rate of return)

Recalculate the Net Present Value for INVESTMENT #1 ONLY but assume that the required/target rate of return is 6%, 12%, and 20%.

Investment Cost 3 Salvage Value 4 Useful Life (years) Investment 1 Investment 2 $ 800,000 $ 500,000 $ 40,000 $ 50,000 15 5 Annual Depreciation 6 Required Rate of Return on Investments 7 Sales 8 Variable Costs 9 Fixed Costs (excluding Depreciation) 10 Tax Rate 10% $ 450,000 $ 400,000 $ 150,000 175,000 $ 100,000 150,000 35% 35% 12 Income Statement: 13 Sales 14 Variable Costs 5 Contribution Margin 16 Fixed Costs (excluding Depreciation) 17 Depreciation 18 Earnings Before Taxes $ 450,000 $ 400,000 $ 150,000 $ 175,000 $ 300,000225,000 $ 100,000$ 150,000 $ 95,000 $ 30,000 $ 105,000 45,000 $ 36,750 $ 15,750 19 Taxes 0 Earnings After Taxes 2 23 Annual After-Tax Cash Flow 4 Earnings After Taxes 5 Depreciation 26 Annual After-Tax Cash Flow 27 28 9 After-Tax Cash Flow For Salvage Value 0 Market Value of Asset at the end of useful life $50,000$ 40,000 $ 68,250$ 29,250 $ 95,000 $ 30,000 1 Book Value of Asset at the end of useful life 2 Gain (Loss) 3 Tax on Gain (Loss) 34 5 Cash from Sale of Asset 6 Tax on Sale 7 Net Cash from Sale of Asset Investment Cost 3 Salvage Value 4 Useful Life (years) Investment 1 Investment 2 $ 800,000 $ 500,000 $ 40,000 $ 50,000 15 5 Annual Depreciation 6 Required Rate of Return on Investments 7 Sales 8 Variable Costs 9 Fixed Costs (excluding Depreciation) 10 Tax Rate 10% $ 450,000 $ 400,000 $ 150,000 175,000 $ 100,000 150,000 35% 35% 12 Income Statement: 13 Sales 14 Variable Costs 5 Contribution Margin 16 Fixed Costs (excluding Depreciation) 17 Depreciation 18 Earnings Before Taxes $ 450,000 $ 400,000 $ 150,000 $ 175,000 $ 300,000225,000 $ 100,000$ 150,000 $ 95,000 $ 30,000 $ 105,000 45,000 $ 36,750 $ 15,750 19 Taxes 0 Earnings After Taxes 2 23 Annual After-Tax Cash Flow 4 Earnings After Taxes 5 Depreciation 26 Annual After-Tax Cash Flow 27 28 9 After-Tax Cash Flow For Salvage Value 0 Market Value of Asset at the end of useful life $50,000$ 40,000 $ 68,250$ 29,250 $ 95,000 $ 30,000 1 Book Value of Asset at the end of useful life 2 Gain (Loss) 3 Tax on Gain (Loss) 34 5 Cash from Sale of Asset 6 Tax on Sale 7 Net Cash from Sale of Asset