1. The manager of PPO Inc. plans to manufacture engine blocks for classic cars from the 1960s. The revenue from the blocks will be $800,000 per year for each of the next 4 years. The equipment will cost $800,000 depreciated using a 3 year MACRS life. There will be a change in net operating working capital of S10,000. Assume a zero salvage value. Operating costs for each of the 4 years will be $400,000. Assume a 25% tax rate and an 8% cost of capital. a. What are the cash flows for years 0 through 4? b. Calculate the net present value, the IRR, Profitability Index, and Payback for the project. c. Will you accept the project?
1. The manager of PPO Inc. plans to manufacture engine blocks for classic cars from the 1960s. The revenue from the blocks will be $800,000 per year for each of the next 4 years. The equipment will cost $800,000 depreciated using a 3 year MACRS life. There will be a change in net operating working capital of S10,000. Assume a zero salvage value. Operating costs for each of the 4 years will be $400,000. Assume a 25% tax rate and an 8% cost of capital. a. What are the cash flows for years 0 through 4? b. Calculate the net present value, the IRR, Profitability Index, and Payback for the project. c. Will you accept the project?
Chapter9: Capital Budgeting And Cash Flow Analysis
Section: Chapter Questions
Problem 18P
Related questions
Question
Transcribed Image Text:1. The manager of PPO Inc. plans to manufacture engine blocks for classic cars from the
1960s. The revenue from the blocks will be S800,000 per year for each of the next 4
years. The equipment will cost $800,000 depreciated using a 3 year MACRS life. There
will be a change in net operating working capital of $10,000. Assume a zero salvage
value. Operating costs for each of the 4 years will be S$400,000. Assume a 25% tax rate
and an 8% cost of capital.
a. What are the cash flows for years 0 through 4?
b. Calculate the net present value, the IRR, Profitability Index, and Payback for the
project.
c. Will you accept the project?
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 3 steps with 6 images
Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
Intermediate Financial Management (MindTap Course…
Finance
ISBN:
9781337395083
Author:
Eugene F. Brigham, Phillip R. Daves
Publisher:
Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
Intermediate Financial Management (MindTap Course…
Finance
ISBN:
9781337395083
Author:
Eugene F. Brigham, Phillip R. Daves
Publisher:
Cengage Learning
Fundamentals Of Financial Management, Concise Edi…
Finance
ISBN:
9781337902571
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Cornerstones of Cost Management (Cornerstones Ser…
Accounting
ISBN:
9781305970663
Author:
Don R. Hansen, Maryanne M. Mowen
Publisher:
Cengage Learning
Principles of Accounting Volume 1
Accounting
ISBN:
9781947172685
Author:
OpenStax
Publisher:
OpenStax College