ACME Mining is considering two capital projects. Project A (five-year horizon), considered to be high risk, is expanding capacity for exploration at a cost of $1,200,000, with the expectation of before-tax operating cash flows of $400,000 per year for five years. The required capital assets have a five-year life and a terminal disposal value of zero. The capital assets are disposed at the end of their useful life within the fifth tax year. Project B (four-year horizon), considered to be low risk, is expanding production at a cost of $1,000,000, with the expectation of before-tax operating cash flows of $400,000 per year for four years. The required capital assets have a four-year life and a terminal disposal value of zero. The capital assets are disposed at the end of their useful life within the fourth tax year. ACME Mining has a marginal tax rate of 20% and the equipment for both capital projects qualifies for a CCA rate of 30%. The after-tax required rate of return for all projects is 10%. For Project A, show the following after-tax discounted cash flows at the initial date (when the decision is made) corresponding to the following. Do not forget to use negative signs for cash outflows. • The initial investment $ • The increase in tax shield $ • The recurring operating cash flows for the five years of the project (in total) Calculate the NPV of project A: $ For Project B, show the following after-tax discounted cash flows at the initial date (when the decision is made) corresponding to the following. Do not forget to use negative signs for cash outflows. • The initial investment $ • The increase in tax shield $ ⚫ The recurring operating cash flows for the four years of the project (in total) Calculate the NPV of project B: $
ACME Mining is considering two capital projects. Project A (five-year horizon), considered to be high risk, is expanding capacity for exploration at a cost of $1,200,000, with the expectation of before-tax operating cash flows of $400,000 per year for five years. The required capital assets have a five-year life and a terminal disposal value of zero. The capital assets are disposed at the end of their useful life within the fifth tax year. Project B (four-year horizon), considered to be low risk, is expanding production at a cost of $1,000,000, with the expectation of before-tax operating cash flows of $400,000 per year for four years. The required capital assets have a four-year life and a terminal disposal value of zero. The capital assets are disposed at the end of their useful life within the fourth tax year. ACME Mining has a marginal tax rate of 20% and the equipment for both capital projects qualifies for a CCA rate of 30%. The after-tax required rate of return for all projects is 10%. For Project A, show the following after-tax discounted cash flows at the initial date (when the decision is made) corresponding to the following. Do not forget to use negative signs for cash outflows. • The initial investment $ • The increase in tax shield $ • The recurring operating cash flows for the five years of the project (in total) Calculate the NPV of project A: $ For Project B, show the following after-tax discounted cash flows at the initial date (when the decision is made) corresponding to the following. Do not forget to use negative signs for cash outflows. • The initial investment $ • The increase in tax shield $ ⚫ The recurring operating cash flows for the four years of the project (in total) Calculate the NPV of project B: $
Chapter9: Capital Budgeting And Cash Flow Analysis
Section: Chapter Questions
Problem 17P
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Transcribed Image Text:ACME Mining is considering two capital projects. Project A (five-year horizon), considered to be high risk, is expanding capacity for exploration at a cost of
$1,200,000, with the expectation of before-tax operating cash flows of $400,000 per year for five years. The required capital assets have a five-year life
and a terminal disposal value of zero. The capital assets are disposed at the end of their useful life within the fifth tax year.
Project B (four-year horizon), considered to be low risk, is expanding production at a cost of $1,000,000, with the expectation of before-tax operating cash
flows of $400,000 per year for four years. The required capital assets have a four-year life and a terminal disposal value of zero. The capital assets are
disposed at the end of their useful life within the fourth tax year.
ACME Mining has a marginal tax rate of 20% and the equipment for both capital projects qualifies for a CCA rate of 30%. The after-tax required rate of
return for all projects is 10%.
For Project A, show the following after-tax discounted cash flows at the initial date (when the decision is made) corresponding to the following. Do not
forget to use negative signs for cash outflows.
• The initial investment $
• The increase in tax shield $
• The recurring operating cash flows for the five years of the project (in total)
Calculate the NPV of project A: $
For Project B, show the following after-tax discounted cash flows at the initial date (when the decision is made) corresponding to the following. Do not forget
to use negative signs for cash outflows.
• The initial investment $
• The increase in tax shield $
⚫ The recurring operating cash flows for the four years of the project (in total)
Calculate the NPV of project B: $
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