Good day can I have some assistance with the attached question Ocean Tide Industries is planning to introduce a new product with a projected life of eightyears. The project is in the government’s preferred industry list and qualifies for a one-timesubsidy of $2,000,000 at the start of the project. Initial equipment (IE) will cost $14,000,000and an additional equipment (AE) costing $1,000,000 will be needed at the end of year 2. Atthe end of 8 years, the original equipment, IE, will have no resale value but the supplementaryequipment, AE, can be sold for its book value of $100,000. A working capital of $1,500,000will be needed.The sales volume over the eight-year period have been forecast as follows:Year 180,000 unitsYear 2120,000 unitsYears 3-5300,000 unitsYears 6-8200,000 unitsA sale price of $100 per unit is expected and the variable expenses will amount to 40% of salesrevenue. Fixed cash operating expenses will amount to $1,600,000 per year.Additionally, an extensive advertising campaign will be launched, which will need annualexpenses as follows:Year 1$3,000,000Year 2$1,500,000Years 3-5$1,000,000Years 6-8$400,000The company falls in the 50% tax category and believes 12% to be an appropriate estimate forits after-tax cost of capital for a project of this nature. All equipment is depreciated on a straight-line basis. In the event of a negative taxable income, the tax is computed as usual and is reportedas a negative number, indicating a reduction in loss after tax.You are required to:1. Compute the initial cash flow for the project2. Compute the earnings before taxes for years 1 through 8 -3. Compute the earnings after taxes for years 1 through 8 –

Given, Government subsidy = 2000000 Initial equipment cost = 14000000 Initial working capital =…

Ocean Tide Industries is planning to introduce a new product with a projected life of eight years. The project is in the government's preferred industry list and qualifies for a one-time subsidy of $2,000,000 at the start of the project. Initial equipment (IE) will cost $14,000,000 and an additional equipment (AE) costing $1,000,000 will be needed at the end of year 2. At the end of 8 years, the original equipment, IE, will have no resale value but the supplementary equipment, AE, can be sold for its book value of $100,000. A working capital of $1,500,000 will be needed. The sales volume over the eight-year period have been forecast as follows: Year 1 80,000 units Year 2 120,000 units Years 3-5 300,000 units

Ocean Tide Industries is planning to introduce a new product with a projected life of eight years. The project is in the government's preferred industry list and qualifies for a one-time subsidy of $2,000,000 at the start of the project. Initial equipment (IE) will cost $14,000,000 and an additional equipment (AE) costing $1,000,000 will be needed at the end of year 2. At the end of 8 years, the original equipment, IE, will have no resale value but the supplementary equipment, AE, can be sold for its book value of $100,000. A working capital of $1,500,000 will be needed. The sales volume over the eight-year period have been forecast as follows: Year 1 80,000 units Year 2 120,000 units Years 3-5 300,000 units

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

Good day can I have some assistance with the attached question

Ocean Tide Industries is planning to introduce a new product with a projected life of eight
years. The project is in the government’s preferred industry list and qualifies for a one-time
subsidy of $2,000,000 at the start of the project. Initial equipment (IE) will cost $14,000,000
and an additional equipment (AE) costing $1,000,000 will be needed at the end of year 2. At
the end of 8 years, the original equipment, IE, will have no resale value but the supplementary
equipment, AE, can be sold for its book value of $100,000. A working capital of $1,500,000
will be needed.
The sales volume over the eight-year period have been forecast as follows:
Year 1
80,000 units
Year 2
120,000 units
Years 3-5
300,000 units
Years 6-8
200,000 units
A sale price of $100 per unit is expected and the variable expenses will amount to 40% of sales
revenue. Fixed cash operating expenses will amount to $1,600,000 per year.
Additionally, an extensive advertising campaign will be launched, which will need annual
expenses as follows:
Year 1
$3,000,000
Year 2
$1,500,000
Years 3-5
$1,000,000
Years 6-8
$400,000
The company falls in the 50% tax category and believes 12% to be an appropriate estimate for
its after-tax cost of capital for a project of this nature. All equipment is depreciated on a straight-
line basis. In the event of a negative taxable income, the tax is computed as usual and is reported
as a negative number, indicating a reduction in loss after tax.
You are required to:
1. Compute the initial cash flow for the project
2. Compute the earnings before taxes for years 1 through 8 -
3. Compute the earnings after taxes for years 1 through 8 –

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