Keith Urban Bookstores is considering a major expansion of its business. The details of the proposed expansion project are summarized below: The company will have to purchase $600,000 in equipment at t = 0. This is the depreciable cost. The project has an economic life of four years. The cost can be depreciated on a MACRS 3-year basis, which implies the following depreciation schedule: МACRS Year 1 Depreciation Rates 0.33 0.45 0.15 0.07 H234
Keith Urban Bookstores is considering a major expansion of its business. The details of the proposed expansion project are summarized below: The company will have to purchase $600,000 in equipment at t = 0. This is the depreciable cost. The project has an economic life of four years. The cost can be depreciated on a MACRS 3-year basis, which implies the following depreciation schedule: МACRS Year 1 Depreciation Rates 0.33 0.45 0.15 0.07 H234
Chapter19: Lease And Intermediate-term Financing
Section: Chapter Questions
Problem 8P
Related questions
Question
![Keith Urban Bookstores is considering a major expansion of its business. The details of
the proposed expansion project are summarized below:
The company will have to purchase $600,000 in equipment at t = 0. This is the
depreciable cost.
The project has an economic life of four years.
The cost can be depreciated on a MACRS 3-year basis, which implies the
following depreciation schedule:
MACRS
Depreciation
Rates
Year
1
0.33
0.45
0.15
0.07
2
3
4
At t = 0, the project requires that inventories increase by $40,000 and accounts
payable increase by $5,000. The change in net operating working capital is
expected to be fully recovered at t = 4. (Hint: NWC = CA-CL)
The project's salvage value at the end of four years is expected to be $0.
The company forecasts that the project will generate $700,000 in sales the first
two years (t = 1 and 2) and $400,000 in sales during the last two years (t = 3 and
4).
Each year the project's operating costs excluding depreciation are expected to
be 55% of sales revenue.
The company's tax rate is 40%.
The project's cost of capital is 11%.
What is CFFA at year 0?
a. -$540,000
b. -$645,000
c. -$535,000
d. -$635,000
What is CFFA at year 4?
a. $159,000
b. $174,000
c. $159,800
d. $200,000](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F0bd1c1ef-db64-4dda-a51a-6baac1ef08af%2Fc34858b3-2f67-4c90-96fc-12eaaa119ffa%2Fn1fga7l_processed.png&w=3840&q=75)
Transcribed Image Text:Keith Urban Bookstores is considering a major expansion of its business. The details of
the proposed expansion project are summarized below:
The company will have to purchase $600,000 in equipment at t = 0. This is the
depreciable cost.
The project has an economic life of four years.
The cost can be depreciated on a MACRS 3-year basis, which implies the
following depreciation schedule:
MACRS
Depreciation
Rates
Year
1
0.33
0.45
0.15
0.07
2
3
4
At t = 0, the project requires that inventories increase by $40,000 and accounts
payable increase by $5,000. The change in net operating working capital is
expected to be fully recovered at t = 4. (Hint: NWC = CA-CL)
The project's salvage value at the end of four years is expected to be $0.
The company forecasts that the project will generate $700,000 in sales the first
two years (t = 1 and 2) and $400,000 in sales during the last two years (t = 3 and
4).
Each year the project's operating costs excluding depreciation are expected to
be 55% of sales revenue.
The company's tax rate is 40%.
The project's cost of capital is 11%.
What is CFFA at year 0?
a. -$540,000
b. -$645,000
c. -$535,000
d. -$635,000
What is CFFA at year 4?
a. $159,000
b. $174,000
c. $159,800
d. $200,000
![3.
What is CFFA at year 2?
a. $282,000
b. $290,000
c. $275,000
d. $297,000
4.
What is the Depreciation for year 3?
a. $ 90,000
b. $ 75,000
c. $125,000
d. $ 95,000
What is the Depreciation Tax Shield benefit at year 2?
a. $ 66,000
b. $130,000
c. $108,000
d. $ 90,000
What is the NPV of this project?
a. $ 73,987
b. $159,145
c. -$ 27,456
d. $ 58,230
5.
6.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F0bd1c1ef-db64-4dda-a51a-6baac1ef08af%2Fc34858b3-2f67-4c90-96fc-12eaaa119ffa%2Fa3puwzi_processed.png&w=3840&q=75)
Transcribed Image Text:3.
What is CFFA at year 2?
a. $282,000
b. $290,000
c. $275,000
d. $297,000
4.
What is the Depreciation for year 3?
a. $ 90,000
b. $ 75,000
c. $125,000
d. $ 95,000
What is the Depreciation Tax Shield benefit at year 2?
a. $ 66,000
b. $130,000
c. $108,000
d. $ 90,000
What is the NPV of this project?
a. $ 73,987
b. $159,145
c. -$ 27,456
d. $ 58,230
5.
6.
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