The Culinary Institute is considering a classroom remodeling project. The cost of the remodel would be $350,000 and will be depreciated over six years using the straight- line method. The model will acoomoodate five extra student per year. Additional information related to the project follows:
Cost of the remodel project: $350,000
Useful life of project in years: 6
Annual number of extra students: 5
Annual tuition per student: $22,000
Before- tax incremental cost of a student: $2,000
Company's income tax rate: 20%
Required rate of return: 12%
Assuming a six- year time horizon, what is the internal rate of return of the remodeling project? Calculate using both present value factors and separately using Excel's IRR function.
P
lease include formulas to show how you arrive at each solution!
A) Annual cash flow:
Revenue ?
Less costs:
Other than depreciation ?
Depreciation ?
Income before taxes ?
Income tax expense ?
Net income ?
Add depreciation ?
Cash flow ?
B) Present Value Factor- solve
? / ? = ? Factor
c) Indicate how the internal rate of return is calculated using the factor arrived at above.
d) IRR function
Cash Flows
Investment
1 2 3 4 5
? ? ? ? ? ?
IRR = ?
Should the company invest in the remodel?