Fundamentals Of Corporate Finance, 9th Edition
9th Edition
ISBN: 9781260052220
Author: Richard Brealey; Stewart Myers; Alan Marcus
Publisher: McGraw-Hill Education
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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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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.…
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%
Equpiment cost
$200,000
Units sold
58,000
Average price per unit, Year 1
$25.00
Fixed op. costs (constant)…
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?
WACC
10.0%
Equpiment cost
$200,000
Units sold
56,000
Average price per unit, Year 1
$25.00
Fixed op. costs (constant)
$150,000
Variable op. cost/unit, Year 1
$20.20
Expected annual inflation rate
5.00%
Tax rate…
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