Principles of Managerial Finance, Student Value Edition Plus NEW MyLab Finance with Pearson eText -- Access Card Package (14th Edition)
Principles of Managerial Finance, Student Value Edition Plus NEW MyLab Finance with Pearson eText -- Access Card Package (14th Edition)
14th Edition
ISBN: 9780133740912
Author: Lawrence J. Gitman, Chad J. Zutter
Publisher: PEARSON
Question
Chapter 11, Problem 1OR

a)

Summary Introduction

Case summary:

Company DCD is the largest distributor of graphic novels and comics in the world. In the year 2013, Company DCD came up with a new plan to help the comic book stores to expand.

The cost of opening a new store has to make a lot of investment to fill the shelves with the inventory of the merchandise. The company must look at the inflows and outflows to make the relevant decisions.

To calculate: The net present value and the internal rate of return.

Introduction:

Net present value (NPV):

It is the difference between the present value of cash inflows and cash outflows within a period of time.

Internal rate of return:

It is a method to calculate the profitability of the potential investments. It is a discount rate which makes the net present value as zero.

a)

Expert Solution
Check Mark

Explanation of Solution

Given information:

Investment = $400,000

Cashflow = $62,000

Tax rate = 35%

Calculation of after-tax annual cash flow:

After tax annual cash flow=Cashflow×(1-Tax rate)=62,000×(1-35100)=$40,300

After-tax cash flow in terminal year:

After-tax cash flow=40,300+250,000=$290,300

Calculation of NPV and IRR:

Principles of Managerial Finance, Student Value Edition Plus NEW MyLab Finance with Pearson eText -- Access Card Package (14th Edition), Chapter 11, Problem 1OR , additional homework tip  1

Formula:

Principles of Managerial Finance, Student Value Edition Plus NEW MyLab Finance with Pearson eText -- Access Card Package (14th Edition), Chapter 11, Problem 1OR , additional homework tip  2

b)

Summary Introduction

To calculate: The net present value and the internal rate of return.

Introduction:

Net present value (NPV):

It is the difference between the present value of cash inflows and cash outflows within a period of time.

Internal rate of return:

It is a method to calculate the profitability of the potential investments. It is a discount rate which makes the net present value as zero.

b)

Expert Solution
Check Mark

Explanation of Solution

Given information:

Investment = $300,000

Cashflow = $62,000

Tax rate = 35%

Calculation of after-tax annual cash flow:

After tax annual cash flow=Cashflow×(1-Tax rate)=62,000×(1-35100)=$40,300

After-tax cash flow in terminal year:

After-tax cash flow=40,300+150,000=$190,300

Calculation of NPV and IRR:

Principles of Managerial Finance, Student Value Edition Plus NEW MyLab Finance with Pearson eText -- Access Card Package (14th Edition), Chapter 11, Problem 1OR , additional homework tip  3

Formula:

Principles of Managerial Finance, Student Value Edition Plus NEW MyLab Finance with Pearson eText -- Access Card Package (14th Edition), Chapter 11, Problem 1OR , additional homework tip  4

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Chapter 11 Solutions

Principles of Managerial Finance, Student Value Edition Plus NEW MyLab Finance with Pearson eText -- Access Card Package (14th Edition)

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