. A firm is considering a project which would require the purchase of $1mm in equipment, which would be on a 10 yr. straight line depreciation schedule. This would generate $1.6mm in EBIT for each of the next 5 years. The firm's marginal tax rate is 21%. The firm would lose $90,000 in annual cash flows due to existing product sales being cannibalized The firm would sell the equipment after 5 years for $400,000. What is the project NPV, if the firm's WACC is 10%?
. A firm is considering a project which would require the purchase of $1mm in equipment, which would be on a 10 yr. straight line depreciation schedule. This would generate $1.6mm in EBIT for each of the next 5 years. The firm's marginal tax rate is 21%. The firm would lose $90,000 in annual cash flows due to existing product sales being cannibalized The firm would sell the equipment after 5 years for $400,000. What is the project NPV, if the firm's WACC is 10%?
Chapter9: Capital Budgeting And Cash Flow Analysis
Section: Chapter Questions
Problem 13P
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Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
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3. A firm is considering a project which would require the purchase of $1mm in equipment, which would be on a 10 yr. straight line depreciation schedule. This would generate $1.6mm in EBIT for each of the next 5 years. The firm's marginal tax rate is 21%. The firm would lose $90,000 in annual cash flows due to existing product sales being cannibalized The firm would sell the equipment after 5 years for $400,000. What is the project NPV, if the firm's WACC is 10%?
Transcribed Image Text:3. A firm is considering a project which would require the purchase of $1mm in equipment, which would be on a 10 yr straight line depreciation schedule. This would
generate $1.6mm in EBIT for each of the next 5 years. The firm's marginal tax rate is 21%. The firm would lose $90,000 in annual cash flows due to existing product
sales being cannibalized
The firm would sell the equipment after 5 years for $400,000, What is the project NPV, if the firm's WACC is 10%7
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