EBK FUNDAMENTALS OF CORPORATE FINANCE
9th Edition
ISBN: 9781260049237
Author: BREALEY
Publisher: MCGRAW HILL BOOK COMPANY
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Chapter 10, Problem 15QP
a)
Summary Introduction
To discuss: Whether the accounting break-even sales will increase or decrease.
b)
Summary Introduction
To discuss: Whether the
c)
Summary Introduction
To discuss: Whether the part (a) or part (b) is important and whether it is attractive to switch the project to MACRS.
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A firm wants to invest in a project whose financial information is below. The tax rate is 30%, and the MARR (Minimum Attractive Rate of Return) is 16%. Answer the following questions based on the information given in the table.
Initial investment cost (TL)
155,000
Operating expenses (TL/year)
42,000
General maintenance cost (TL) (end of 3rd year)
26,500
Income (TL/year)
65,000
Salvage value (TL)
41,000
Economic life (year)
5
Taking into account the net cash flows of the project after tax;
a) Calculate the annual depreciation amount required by the company for the project using the straight-line (SL) depreciation method.
b) What is the project's net cash flow amount in the initial period?
c) What is the project’s net cash flow amount in the operating periods?
d) What is the project's net cash flow amount in the last period?
e) Calculate the Net Present Value of the project and evaluate it from an economic point of view.
Desai Industries is analyzing an average-risk project, and the following data have been developed. Unit sales will be constant, but the sales price should increase with inflation. Fixed costs will also be constant, but variable costs should rise with inflation. The project should last for 3 years. Under the new tax law, the equipment used in the project is eligible for 100% bonus depreciation, so it will be fully depreciated at t = 0. At the end of the project’s life, the equipment would have no salvage value. No change in net operating working capital (NOWC) would be required for the project. This is just one of many projects for the firm, so any losses on this project can be used to offset gains on other firm projects. What is the project's expected NPV? Do not round the intermediate calculations and round the final answer to the nearest whole number.
WACC
10.0%
Equipment cost
$200,000
Units sold
56,000
Average price per unit, Year 1
$25.00
Fixed op. cost excl.…
Poulsen Industries is analyzing an average-risk project, and the following data have been developed. Unit sales will be constant, but the sales price should increase with inflation. Fixed costs will also be constant, but
variable costs should rise with inflation. The project should last for 3 years. Under the new tax law, the equipment for the project is eligible for 100% bonus depreciation, so it will be fully depreciated at t = 0. At the end
of the project's life, the equipment will have no salvage value. No change in net operating working capital (NOWC) would be required for the project. This is just one of many projects for the firm, so any losses on this
project can be used to offset gains on other firm projects. The marketing manager does not think it is necessary to adjust for inflation since both the sales price and the variable costs will rise at the same rate, but the
CFO thinks an inflation adjustment is required. What is the difference in the expected NPV if the inflation…
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EBK FUNDAMENTALS OF CORPORATE FINANCE
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