Optomics Ltd. is investigating an expansion of its services. After consultation with industry, the following two projects are available for investment: Project A Project B CAPEX / Initial Outlay $10,000,000 $21,000,000 Project life Revenue (per year) 8 years $6,000,000 $2,000,000 $1,000,000 7 years $9,000,000 $1,500,000 $2,000,000 Variable costs Operating expense Investment in Net Working Capital (Year 0) $1,500,000 $2,500,000 The company's tax rate is 30% and uses a straight-line depreciation method. There will be no 'salvage' value associated with these projects at the end of their project life. Official Liquidators has a required rate of return of 10% per annum. a) Determine the Free Cash Flows, for each year, to the firm for both projects. b) Identify which project you recommend the company invest in. c) What is meant by incremental cash flows from a capital budgeting perspective? Why should only incremental cash flows be included in the project valuation process?

Optomics Ltd. is investigating an expansion of its services. After consultation with industry, the following two projects are available for investment: Project A Project B CAPEX / Initial Outlay $10,000,000 $21,000,000 Project life Revenue (per year) 8 years $6,000,000 $2,000,000 $1,000,000 7 years $9,000,000 $1,500,000 $2,000,000 Variable costs Operating expense Investment in Net Working Capital (Year 0) $1,500,000 $2,500,000 The company's tax rate is 30% and uses a straight-line depreciation method. There will be no 'salvage' value associated with these projects at the end of their project life. Official Liquidators has a required rate of return of 10% per annum. a) Determine the Free Cash Flows, for each year, to the firm for both projects. b) Identify which project you recommend the company invest in. c) What is meant by incremental cash flows from a capital budgeting perspective? Why should only incremental cash flows be included in the project valuation process?

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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U3 Company is considering three long-term capital investment proposals. Each investment has a useful life of 5 years. Relevant data on each project are as follows. Project Bono Project Edge Project Clayton Capital investment $176,000 $192,500 $212,000 Annual net income: Year 1 15,400 19,800 29,700 15,400 18,700 25,300 15,400 17,600 23,100 4 15,400 13,200 14,300 15,400 9,900 13,200 Total $77,000 $79,200 $105,600 Depreciation is computed by the straight-line method with no salvage value. The company's cost of capital is 15%. (Assume that cash flows occur evenly throughout the year.) Click here to view PV table. (a) Compute the cash payback period for each project. (Round answers to 2 decimal places, e.g. 10.50.) years Project Bono years Project Edge years Project Clayton
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