Mersey Chemicals manufactures polypropylene that it ships to its customers via tank car. Currently it plans to add twoadditional tank cars to its fleet four years from now. However, a proposed plant expansion will require Mersey'stransport division to add these two additional tank cars in 2 years' time rather than in 4 years. The current cost of atank car is $1.9 million, and this cost is expected to remain constant. Also, while tank cars will last indefinitely, they willbe depreciated straight-line over a five-year life for tax purposes. Suppose Mersey's tax rate is 20%. When evaluatingthe proposed expansion, what incremental free cash flows should be included to account for the need to acceleratethe purchase of the tank cars?Incremental FCF for year 0 is Smillion. (Round to two decimal places and outflows as negative values.)

Data given: Initial tank car cost=$1.9 million * 2=$ 3.8 million Inflation rate=0% Depreciable life= 5 years Replace year without expansion=4 year Replace year with expansion = 2 year Tax rate=20% Working Note #1 Calculation of depreciation tax shield: Depreciation tax shield=$3.8million5*20%=$0.152 million Calculation of incremental free cash flow With expansion Year 0 Capex 0 Depreciation tax shield 0 FCF 0 Without expansion Capex 0 Depreciation tax shield 0 FCF 0 Incremental FCF (with expansion - without expansion) 0 ANSWER: Incremental FCF for year 0 is $ 0.00 million Snapshot of cell reference:

Answered: Mersey Chemicals manufactures…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Veer
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United Pigpen (UP) is considering a proposal to manufacture high protein hog feed. The project would make use of an existing warehouse, which is currently rented out to a neighboring firm. The next year's rental charge on the warehouse is $260,000, and thereafter the rent is expected to grow in line with inflation at 4% a year. In addition to using the warehouse, the proposal envisages an investment in plant and equipment of $3.1 million. This could be depreciated for tax purposes over 10 years. However, UP expects to terminate the project at the end of eight years and to resell the plant and equipment in year 8 for $1,040,000. Finally, the project requires an initial investment in working capital of $910,000. Thereafter, working capital is forecasted to be 10% of sales in each of years 1 through 7. Year 1 sales of hog feed are expected to be $10.9 million, and thereafter sales are forecasted to grow by 5% a year, slightly faster than the inflation rate. Manufacturing costs are…
The Elite Car Rental Corporation is contemplating expanding its short-term rental fleet by 30 automobiles at a cost of $900,000. It expects to keep the autos for only two years and to sell them at the end of that period for 60 percent, on average, of what they cost. The plan is to generate $21,000 of incremental revenue per additional auto in each year of operation. The controller estimates that other costs will amount to 20 cents per kilometre on an average of 40,000 kilometres per car per year. She also estimates that the new business will require an investment of $10,000 in additional working capital. The firm is in a 30 percent tax bracket and uses 12 percent as a cost of capital. a. Calculate the NPV. (Do not round the intermediate calculations. Round the final answer to the nearest whole dollar. Negative answer should be indicated by a minus sign. Omit $ sign in your response.) NPV $204286 ง b. Should Elite purchase the automobiles? Yes No
Sagar
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