Managerial Controls and Budgeting Problem - Capital Budgeting; Project Evaluation
SHU is evaluating a classroom expansion project. The cost of the expansion will be $750,000 and will be depreciated over 5 years using the straight-line method. A summary of the project details includes:
|
SHU Classroom Expansion - Project Summary
|
|
Cost of expansion
|
$750,000
|
|
Useful life of project in years
|
5
|
|
Annual number of extra accommodated students
|
8
|
|
Annual tuition per student
|
$35,000
|
|
Before tax incremental cost of a student
|
$4,500
|
|
SHU's income tax rate
|
30%
|
|
Required rate of return
|
12%
|
Required:
1. Assuming a 5 year time horizon, what is the internal rate of return (IRR) of the expansion project? Calculate using both present value factors (table) and using Excel's IRR function. Use the format provided on the answer sheet.
2. Based on your calculations, should SHU invest in the expansion?