Question

Asked Oct 30, 2019

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Consider the following project for Hand Clapper, Inc. The company is considering a 4-

year project to manufacture clap-command garage door openers. This project requires an

initial investment of $16.7 million that will be depreciated straight-line to zero over the

project’s life. An initial investment in net working capital of $1,070,000 is required to

support spare parts inventory; this cost is fully recoverable whenever the project ends.

The company believes it can generate $14.3 million in revenues with $5.8 million in

operating costs. The tax rate is 22 percent and the discount rate is 14 percent. The

market value of the equipment over the life of the project is as follows:

Year Market Value ($ millions)

1 $ 14.70

2 11.70

3 9.20

4 1.95

a. Assuming Hand Clapper operates this project for four years, what is the NPV?

b. Compute the project NPV assuming the project is abandoned after only one year.

c. Compute the project NPV assuming the project is abandoned after only two years.

d. Compute the project NPV assuming the project is abandoned after only three

years.

Step 1

As per the rule, I will answer first three parts of the question. Please post again for the last part to be answered, mention the same in the question.

To calculate the NPV of the project, first depreciation is calculated using straight-line method, then income statement and cash flow of the company is prepared.

Please refer to the whiteboard for calculations

Step 2

Step 3

Calculation of Gain on Sale of Asset at the end of 4 years and Cash flow statement...

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