Question 1 Consider the following data - A machine costs \$950 today (year 0). Assume this investment is fully tax-deductible, as stipulated by the new US corporate tax code of 2018. - This company has...

Attached is an excel sheet that has 6 questions to be answered.

Answer To: Question 1 Consider the following data - A machine costs \$950 today (year 0). Assume this investment...

Prateek answered on Jul 07 2022
Question 1
Consider the following data
-      A machine costs \$950 today (year 0). Assume this investment is fully tax-deductible, as stipulated by the new US corporate tax code of 2018.
-      This company has current pre-tax profits from other projects that are greater than \$950, so it
can take full advantage of the investment tax break above in year 0.
-      The machine will generate operating profits before depreciation (EBITDA) of \$520 per year for 5 years. The first cash flow happens one year after the machine is put in place (year 1).
-      Depreciation is not tax-deductible. Notice that you do not need to calculate depreciation at all to solve this problem since it has no effect on taxes.
-      The tax rate is 21%
-      There is no salvage value at the end of the five years (the machine is worthless), and no required working capital investment.
Compute the NPV of the project if the discount rate is 8%. Please show your work below, not just the final answer (15 points)
NPV =     \$ 690.21
NOTE - The answer cell must remain in B10.
Solution
Tax Rate    21%
Discount Rate    8%
Year    0    1    2    3    4    5
Machinery Cost    -\$950.00
EBITDA        \$520.00    \$520.00    \$520.00    \$520.00    \$520.00
less: Tax        \$109.20    \$109.20    \$109.20    \$109.20    \$109.20
NOPAT        \$410.80    \$410.80    \$410.80    \$410.80    \$410.80
Free Cash Flow    -\$950.00    \$410.80    \$410.80    \$410.80    \$410.80    \$410.80
NPV    \$690.21
Question 2
An investment requires \$9,000 today, and produces the first cash flow of \$300 in two years (year 2). Cash flow is expected to grow at 3% a year after year 2.
a)   What is the NPV of this investment if the discount rate is 7% ? (8 points)
NPV =     \$ (1,990.65)
b)   What is the rate of return of this investment? (8 points)
Rate of return =     -8.09%
NOTE - The answer cells must remain in B4 and B6.
Solution
Given:
Growth Rate    3%
Discount Rate    7%
Year    0    1    2    Terminal Cash Flow
Investment    -\$9,000.00
Cash Flow            \$300.00    \$7,725.00
PVIF    1.0000    0.9346    0.8734
PV of Cash Flows    -\$9,000.00    \$0.00    \$262.03    \$6,747.31
NPV (a)    -\$1,990.65
IRR (b)    -8%
Question 3
You are the CFO of a drug company, and you must decide whether to invest 15M dollars in R&D for a new drug. If you conduct the R&D, you believe that there is a 4% chance that the research will produce a useful drug. If the research is successful, investment in the drug will require an outlay of 400 million dollars. The drug will likely generate annual profits of 100 million for 10 years, until the patent expires. After that, it will generate a cash flow equal to 10 million a year in perpetuity (no growth) . The discount rate is 7%.
a)   If the research is successful, what is the net present value of the drug cash flows ? (10 points)
NPV if...
SOLUTION.PDF