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 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. 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. compute the following Compute the initial cash flow for the project Compute the earnings before taxes for years 1 through 8 Compute the earnings after taxes for years 1 through 8

EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN:9781337514835
Author:MOYER
Publisher:MOYER
Chapter10: Capital Budgeting: Decision Criteria And Real Option
Section: Chapter Questions
Problem 14P
icon
Related questions
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 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. 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.

compute the following

  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 – 3 marks 8. Should the project be accepted?
Expert Solution
steps

Step by step

Solved in 5 steps with 2 images

Blurred answer
Knowledge Booster
Capital Budgeting
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.
Similar questions
  • SEE MORE QUESTIONS
Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT