Question

(E) 15.4% ON12 AMC is contemplating a new automatic surveillance system to replace its current security system. It will cost $400.000 to get the new system. The cost will be depreciated using straight- line depreciation approach over the system's four-year expected life. The system is expected to have zero salvage value after 4 years. It is estimated that the new system will generate $250.000 revenue and the cash expenses will increase by S1P5,000. The marginal federal plus state tax rate is 34 percent and the discount rate of the project is 17 percent. 12 (i) What is the estimated operating cash flow of the project in year 1 through 42 (5pts.) (Use Operating Cash flow-Net Income + Depreciation) Show your work below Depreciation Loco - 100,000 (A) 125,000 (B) 250,000 (C) 16,500 (D) 100,000 (E) 116,500 12(ii) What is the NPV of the project? (5pts) (A) 16,500 Show your work below -CE ICF (B) (80,410) CE (C) (80, 510) Citrol. He then (D) 116,500 (E) 100,000

Answer 1

12.i. Operating cash Flow = (Revenues - Expenses - Depreciation ) * (1 - Tax) + Depreciation

Operating cash Flow = (250000 - 125000 - 400000 / 4 ) * (1 - 0.34) + 400000/4

Operating cash Flow = (250000 - 125000 - 100000 ) * (1 - 0.34) + 100000

Operating cash Flow = 25000 * 0.66 + 100000

Operating cash Flow = 116500 Option E

12.ii. NPV = - Initial Investment + Cash Flow Year 1 / (1 + r) + Cash Flow Year 2 / (1 + r)^2 + Cash Flow Year 3 / (1 + r)^3 + Cash Flow Year 4 / (1 + r)^4

NPV = - 400000 + 116500 / (1 + 0.17) + 116500 / (1 + 0.17)^2 + 116500 / (1 + 0.17)^3 + 116500 / (1 + 0.17)^4

NPV = - 400000 + 99572.60 + 85104.80 + 72739.20 + 62170.20

NPV = - 80410 Option B

12.iii. IRR

NPV at 5%

NPV = - 400000 + 116500 / (1 + 0.05) + 116500 / (1 + 0.05)^2 + 116500 / (1 + 0.05)^3 + 116500 / (1 + 0.05)^4

NPV = - 400000 + 110952 + 105669 + 100637 + 95844

NPV = $13103

Using Interpolation Method

IRR = 5% + [$13103 / (13103 + 80410)] * 12%

IRR = 6.40% Approx. Option D

13. After Tax Cost of Debt = Before Tax Cost * (1 - Tax)

After Tax Cost of Debt = 9% * (1 - 0.40)

After Tax Cost of Debt = 5.40% Option C