B C D G 1 Problem 9-6 Internal Rate of Return and Taxes - See Textbook page 9-30 2 The Boston Culinary Institute is evaluating a classroom remodeling project. The cost of the remodel will be 3 $350,000 and will be depreciated over six years using the straight-line method. The remodeled room will 4 accommodate five extra students per year. Additional information relating to the project follows 10 11 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 Cost of the remodel project Useful life of project in years Annual number of extra accommodated students Annual tution per student 41 42 43 Before-tax incremental cost of a student Company's income tax rate Required rate of retum 12 13 14 15 Required 16 Assuming a six-year time horizon, what is the internal rate of return of the remodeling project? Calculate 17 using both present value factors and separately using Excel's IRR function 18 19 Annual cash flow Revenue Less costs Other than depreciation Depreciation (straight-line) Income before taxes Income tax expense Net income IRR function Add depreciation Cash flow each year Present value factor $ 350.000 6 5 Investment $ $ IRR 44 45 Should the company invest in the remodel? Explain why or why not 46 22,000 2,000 20% 12% $ 110,000 factor Indicate how the Internal rate of return is calculated using the factor arrived at above 10,000 58.333 100.000 20,000 80.000 138,333 H Cash Flow Per Year 3 Use the excel function in cell 043
B C D G 1 Problem 9-6 Internal Rate of Return and Taxes - See Textbook page 9-30 2 The Boston Culinary Institute is evaluating a classroom remodeling project. The cost of the remodel will be 3 $350,000 and will be depreciated over six years using the straight-line method. The remodeled room will 4 accommodate five extra students per year. Additional information relating to the project follows 10 11 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 Cost of the remodel project Useful life of project in years Annual number of extra accommodated students Annual tution per student 41 42 43 Before-tax incremental cost of a student Company's income tax rate Required rate of retum 12 13 14 15 Required 16 Assuming a six-year time horizon, what is the internal rate of return of the remodeling project? Calculate 17 using both present value factors and separately using Excel's IRR function 18 19 Annual cash flow Revenue Less costs Other than depreciation Depreciation (straight-line) Income before taxes Income tax expense Net income IRR function Add depreciation Cash flow each year Present value factor $ 350.000 6 5 Investment $ $ IRR 44 45 Should the company invest in the remodel? Explain why or why not 46 22,000 2,000 20% 12% $ 110,000 factor Indicate how the Internal rate of return is calculated using the factor arrived at above 10,000 58.333 100.000 20,000 80.000 138,333 H Cash Flow Per Year 3 Use the excel function in cell 043
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:B
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1 Problem 9-6 Internal Rate of Return and Taxes-See Textbook page 9-30
2 The Boston Culinary Institute is evaluating a classroom remodeling project. The cost of the remodel will be
3 $350,000 and will be depreciated over six years using the straight-line method. The remodeled room will
4 accommodate five extra students per year. Additional information relating to the project follows:
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20
21
22
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27
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31
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15 Required
16 Assuming a six-year time horizon, what is the internal rate of return of the remodeling project? Calculate
17 using both present value factors and separately using Excel's IRR function
18
19
39
40
Cost of the remodel project
Useful life of project in years
Annual number of extra accommodated students
Annual tuition per student
41
42
43
Before-tax incremental cost of a student
Company's income tax rate
Required rate of retur
Annual cash flow
Revenue
Less costs:
Other than depreciation
Depreciation (straight-line)
Income before taxes
Income tax expense
Net income
Add depreciation
Cash flow each year
Present value factor
IRR function
$ 350,000
6
5
Investment
$ 22.000
S
2,000
20%
12%
factor
Indicate how the Internal rate of return is calculated using the factor arrived at above.
IRR
EXCE
44
45 Should the company invest in the remodel? Explain why or why not
46
47
$ 110,000
10,000
58.333
100 000
20,000
80,000
138 333
Cash Flow Per Year
3
Use the excel function in cell D43
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