An investment alternative in a project requires a capital cost of $72 million completed at time zero. The investment will produce a stream of revenue of $50 million per year-end over a 6year period with operating costs of $20 million per yearend for the first 3 years and $25 million per yearend for the remaining 3 years. Use straight-line depreciation for the capital cost over the project period. The rate of taxation on income is 40%.
i). Construct the cash flow table, calculate the after-tax annual cash flows, and determine the payback period;
ii) Calculate the present worth and rate of return for this project.
An investment alternative in a project requires a capital cost of $72 million completed at time zero. The investment will produce a stream of revenue of $50 million per year-end over a 6year period with operating costs of $20 million per yearend for the first 3 years and $25 million per yearend for the remaining 3 years. Use straight-line depreciation for the capital cost over the project period. The rate of taxation on income is 40%.
i). Construct the cash flow table, calculate the after-tax annual cash flows, and determine the payback period;
ii) Calculate the present worth and rate of return for this project.
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Bader has been retained to analyze two proposed capital investment projects. projects X and Y. by Star Fashion LLC, a local specialty retailer. Project X is a sophisticated working capital and inventory control system based upon a powerful personal computer. called a system server and PC software specifically designed for inventory processing and control in the retailing business. Project Y is a similarly sophisticated working capital and inventory control system based upon a powerful personal computer and general-purpose PC software. Each project has a cost of S100,000, and the cost of capital for both projects is 12%. The projects' expected net cash flows are as follows:
Expected Net Cash Flow
| Years |
Project X |
Project Y |
| 0 |
($ 100,000) |
($100,000) |
| 1 | 65,000 | 35,000 |
| 2 | 30,000 | 35,000 |
| 3 | 10,000 | 35,000 |
| 4 | 10,000 | 35,000 |
A. Calculate each project's nominal payback period.
B. Calculate Net Present Value (NPV) and comment upon if the two projects are independent or interdependent.
