Problem:

You are considering investing in a project that is a cost cutting proposal. additional net revenues from the project are expected to equal $83.33 for each of the three years of the project life. The process has an initial cost of $125 and will be depreciated straight line over 3 years to a salvage value of zero. Assume a 34% tax bracket and a discount rate of 15%.

Required:

Question 1: What is the value of just the tax shield in each period from the investment in the process?

Question 2: What is the operating cash flow in each of the three periods?

Question 3: Suppose the equipment is sold at the end of year 3 for $20, pretax. What is the NPV?

Question 4: Suppose the equipment is sold at the end of year 3 for $20, pretax. What is the IRR?

Note: Show all workings.