Question - 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 working capital will be released at the end of the project. The investment will last 7 years.
Investment at t=0
|
900,000
|
5-yr MACRS
|
Working Capital at t=0
|
50,000
|
1
|
20.00%
|
Revenue/year
|
285,000
|
2
|
32.00%
|
Expenses/year
|
65,000
|
3
|
19.20%
|
Salvage value
|
-
|
4
|
11.52%
|
Residual value at term
|
20,000
|
5
|
11.52%
|
Tax rate (ordinary & capital gains)
|
30%
|
6
|
5.76%
|
Cost of Capital
|
10.0%
|
|
|
What is the net present value and IRR of the investment? (10%
Net Present Value (NPV)
Internal Rate of Return (IRR)