Reference no: EM133168438
Question 1 - The following information relating to an investment in equipment has been extracted from the books of Pro-CB Ltd:
Total purchase price $69,066; salvage value $3,746 at the end of year-4; net sales revenue (relating to the equipment):
Year-1 $35,000;
Year-2 $27,000,
Year-3 $21,000 and
Year-4 $15,000;
Applicable tax rate is 30%; and the required rate of return is 13%.
If the depreciation rate is 18% straight line, calculate the tax amount in the fourth year relating to the sale of the equipment only.
Question 2 - The following information about two mutually exclusive projects H and K are relevant for requirements (a) to (c) only. W-Max Company is considering investing in project-H, which will require an outlay of $500 million. The project will have a four-year life and at the end of that time, the equipment will be scrapped.
The project is expected to generate the following annual cash flows:
|
Year-1
|
Year-2
|
Year-3
|
Year-4
|
|
Cash inflows
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$540m
|
$440m
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$460m
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$400m
|
|
Cash outflows
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$315m
|
$245m
|
$265m
|
$250m
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The company has a required rate of return of 10.29%. The company normally has two-year payback criteria. The applicable tax rate is 30%.
The alternative project-K offers the following net cash flows:
Year-0 ($500m); Year-1 $131m; Year-2 $179m; Year-3 $239m and Year-4 $282m.
(a) Calculate the (i) NPV, (ii) IRR, (iii) PVI, (iv) Payback period, (v) Discounted payback period for projects H and K.
(b) Calculate the crossover rate (between projects H and K) based on the cash flow data mentioned above. Show the range of required rates for which either project-H or project-K would be preferred.
(c) Based on your findings in requirements a and b above, what would be the decision of selection of project (when the required rate of return is 10.29 percent)?