Impossibilities, 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 |
4,500,000 |
5-yr MACRS |
|
| working capital at t=0 |
75,000 |
1 20% |
|
| Revenue/year |
1,575,000 |
2 32% |
|
| Expenses/year |
525,000 |
3 19.20% |
|
| salvage value |
- |
4 11.52% |
|
| residual value at term |
50,000 |
5 11.52% |
|
| tax rate (ordinary & capital gains) |
30% |
6 5.76% |
|
| Cost of capital |
10% |
|
|
Requirements:
What is the net present value and IRR of the investment? (8%
|
Net Present Value (NPV)
|
|
|
Internal Rate of Return (IRR)
|