Problem - Probabilities, Inc. is considering the following investment. For financial reporting purposed the entire initial investment will be depreciation over 5 years by the straight-line method. For tax purposes, the entire initial investment will be depreciated by MACRS over 5 years. The investment will last 7 years.
|
Investment at t=0
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100,000,000
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5-yr MACRS
|
|
Working Capital at t=0
|
1,750,000
|
1
|
20.00%
|
|
Revenue/year
|
45,000,000
|
2
|
32.00%
|
|
Expenses/year
|
22,000,000
|
3
|
19.20%
|
|
Salvage value
|
-
|
4
|
11.52%
|
|
Residual value at term
|
500,000
|
5
|
11.52%
|
|
Tax rate (ordinary & capital gains)
|
30%
|
6
|
5.76%
|
|
Cost of Capital
|
10.0%
|
|
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Requirements - What is the net present value and IRR of the investment?