The Third Street Eatery is considering a 4 year expansion project that will require an initialfixed asset investment of $2.24 million. The fixed asset will be depreciated straight-line tozero over its 4 year tax life, after which time it will have a market value of $434,000. Theproject requires an initial investment in net working capital of $266,000, which will be fullyrecovered when the project is terminated. Estimated sales are $2,380,000 per year, with costsof $1,013,000. The tax rate is 32.0% and the required return for the project is 16.80%. Findthe project's NPV. Ignore any bonus depreciation.$479,555.79O $706,185.86O $849,111.54O $690,539.26O $886,915.54

Net present value refers to the method of capital budgeting used for evaluating the viability of the…

Answered: The Third Street Eatery is considering…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter9: Capital Budgeting And Cash Flow Analysis

Section: Chapter Questions

Problem 5P

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Friedman Company is considering installing a new IT system. The cost of the new system is estimated to be 2,250,000, but it would produce after-tax savings of 450,000 per year in labor costs. The estimated life of the new system is 10 years, with no salvage value expected. Intrigued by the possibility of saving 450,000 per year and having a more reliable information system, the president of Friedman has asked for an analysis of the projects economic viability. All capital projects are required to earn at least the firms cost of capital, which is 12 percent. Required: 1. Calculate the projects internal rate of return. Should the company acquire the new IT system? 2. Suppose that savings are less than claimed. Calculate the minimum annual cash savings that must be realized for the project to earn a rate equal to the firms cost of capital. Comment on the safety margin that exists, if any. 3. Suppose that the life of the IT system is overestimated by two years. Repeat Requirements 1 and 2 under this assumption. Comment on the usefulness of this information.
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