Need answer for question 7 and 8 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 83. Compute the earnings after taxes for years 1 through 8 -4. Compute the OCF for years 1 through 8 –5. Compute the Terminal cash flow6. Compute the FCF for years 1 through 87. Compute the NPV and IRR8. Should the project be accepted?

Initial equipment cost is $1,40,00,000 Subsidy is $20,00,000 Additional equipment cost is…

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 revenue. Fixed cash operating expenses will amount to $1,600,000 per year. aria expenses amount to of sales 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 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- company 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- 4. Compute the OCF for years 1 through 8 5. Compute the Terminal cash flow 6. Compute the FCF for years 1 through 8 7. Compute the NPV and IRR 8. Should the project be accepted?

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter9: Capital Budgeting And Cash Flow Analysis

Section: Chapter Questions

Problem 21P