A project manager is evaluating whether it is economical to develop a project requiring expenditures at time zero of $20,000 for land, $30,000 for inventory working capital, $80,000 for a steel building, $240,000 for equipment, and $60,000 for vehicles. Starting in year one the manager estimates that production will generate annual end-of-year escalated revenue of $500,000 with escalated operating costs of $300,000. Operating costs and revenue will both escalate at a compound interest rate of 10% per year beginning in year two. Use straight-line depreciation over 39 years for the building cost starting in year one assuming 12 months of service when computing your allowable deduction in year one under the mid-month con- vention. Use 7-Year MACRS depreciation rates for the qualifying equipment cost starting in year one with the half-year convention and the 5-Year MACRS rates for the vehicle cost, again, starting in year one with the half-year convention. The effective combined federal and state income tax rate is 25%. No other income exists against which to utilize deductions so carry any losses forward. A) B) Calculate the project cash flows for the first four years of this business. Neglect any sale value and applicable write- offs at the end of year four assuming the project would continue. Calculate the project cash flows for the first four years of this business and also consider the after-tax cash flow that would be realized if the business were to be sold at the end of year four for a sale value of $600,000. Write off all remaining tax book values at the end of year four to deter- mine taxable gain (or loss) and treat the sale as ordinary income. For a minimum after-tax rate of return of 15%, calculate the overall project after-tax NPV, DCFROR, and PVR.
A project manager is evaluating whether it is economical to develop a project requiring expenditures at time zero of $20,000 for land, $30,000 for inventory working capital, $80,000 for a steel building, $240,000 for equipment, and $60,000 for vehicles. Starting in year one the manager estimates that production will generate annual end-of-year escalated revenue of $500,000 with escalated operating costs of $300,000. Operating costs and revenue will both escalate at a compound interest rate of 10% per year beginning in year two. Use straight-line depreciation over 39 years for the building cost starting in year one assuming 12 months of service when computing your allowable deduction in year one under the mid-month con- vention. Use 7-Year MACRS depreciation rates for the qualifying equipment cost starting in year one with the half-year convention and the 5-Year MACRS rates for the vehicle cost, again, starting in year one with the half-year convention. The effective combined federal and state income tax rate is 25%. No other income exists against which to utilize deductions so carry any losses forward. A) B) Calculate the project cash flows for the first four years of this business. Neglect any sale value and applicable write- offs at the end of year four assuming the project would continue. Calculate the project cash flows for the first four years of this business and also consider the after-tax cash flow that would be realized if the business were to be sold at the end of year four for a sale value of $600,000. Write off all remaining tax book values at the end of year four to deter- mine taxable gain (or loss) and treat the sale as ordinary income. For a minimum after-tax rate of return of 15%, calculate the overall project after-tax NPV, DCFROR, and PVR.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
Related questions
Question
Please only answer part B
Transcribed Image Text:A project manager is evaluating whether it is economical to develop
a project requiring expenditures at time zero of $20,000 for land,
$30,000 for inventory working capital, $80,000 for a steel building,
$240,000 for equipment, and $60,000 for vehicles. Starting in year
one the manager estimates that production will generate annual
end-of-year escalated revenue of $500,000 with escalated operating
costs of $300,000. Operating costs and revenue will both escalate
at a compound interest rate of 10% per year beginning in year two.
Use straight-line depreciation over 39 years for the building cost
starting in year one assuming 12 months of service when computing
your allowable deduction in year one under the mid-month con-
vention. Use 7-Year MACRS depreciation rates for the qualifying
equipment cost starting in year one with the half-year convention
and the 5-Year MACRS rates for the vehicle cost, again, starting
in year one with the half-year convention. The effective combined
federal and state income tax rate is 25%. No other income exists
against which to utilize deductions so carry any losses forward.
A)
B)
Calculate the project cash flows for the first four years of
this business. Neglect any sale value and applicable write-
offs at the end of year four assuming the project would
continue.
Calculate the project cash flows for the first four years of
this business and also consider the after-tax cash flow that
would be realized if the business were to be sold at the
end of year four for a sale value of $600,000. Write off all
remaining tax book values at the end of year four to deter-
mine taxable gain (or loss) and treat the sale as ordinary
income. For a minimum after-tax rate of return of 15%,
calculate the overall project after-tax NPV, DCFROR, and
PVR.
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