V1 Your firm is considering a project that requires a $500,000 investment in fixed assets. These assets will be depreciated straight line over 5 years for tax purposes. However you expect to be able to sell them for $125,000 upon completion of the project four years from now. The project will require a $30,000 initial investment in net working capital. Finally, the project will make use of an asset that the firm purchased two years ago for $80,000. They have been depreciating that asset on a 10-year straight-line depreciation schedule and they estimate they could sell the asset today for $21,000. The new project is expected to generate annual operating cash flows of $130,000 per year over its 4-year life. What is the project’s NPV and should the firm undertake this investment? A tax rate of 21% and discount rate of 8%.
V1 Your firm is considering a project that requires a $500,000 investment in fixed assets. These assets will be depreciated straight line over 5 years for tax purposes. However you expect to be able to sell them for $125,000 upon completion of the project four years from now. The project will require a $30,000 initial investment in net working capital. Finally, the project will make use of an asset that the firm purchased two years ago for $80,000. They have been depreciating that asset on a 10-year straight-line depreciation schedule and they estimate they could sell the asset today for $21,000. The new project is expected to generate annual operating cash flows of $130,000 per year over its 4-year life. What is the project’s NPV and should the firm undertake this investment? A tax rate of 21% and discount rate of 8%.
Chapter10: Capital Budgeting: Decision Criteria And Real Option
Section: Chapter Questions
Problem 2P
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V1
Your firm is considering a project that requires a $500,000 investment in fixed assets. These assets will be depreciated straight line over 5 years for tax purposes. However you expect to be able to sell them for $125,000 upon completion of the project four years from now. The project will require a $30,000 initial investment in net working capital. Finally, the project will make use of an asset that the firm purchased two years ago for $80,000. They have been depreciating that asset on a 10-year straight-line depreciation schedule and they estimate they could sell the asset today for $21,000. The new project is expected to generate annual operating cash flows of $130,000 per year over its 4-year life. What is the project’s NPV and should the firm undertake this investment? A tax rate of 21% and discount rate of 8%.
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