Rare Agri-Products Ltd. is considering a new project with a projected life of seven (7) years. The project falls under the government’s subsidy program for encouraging local agricultural products and is eligible for a one-time rebate of 25% on any initial equipment installed for the project. The initial equipment (IE) will cost $41,000,000. An additional equipment (AE) costing $3,500,000 will be needed at the end of year 3. At the end of seven (7) years, the original equipment, IE, will have no resale value but the supplementary equipment, AE, can be sold for $50,000. A working capital of $1,350,000 will be needed. The project is forecast to generate sales of agri-products over the seven years as follows: Year 1  Year 2  Years 3-5  Years 6-7  70,000 units 100,000 units 250,000 units 325,000 units A sale price of $150 per unit for the first two years is expected and then decline to $90 per unit thereafter as the newness of the product loses some sheen. The variable expenses will amount to 30% of sales revenue. Fixed cash operating expenses will amount to $1,100,000 per year. The company falls in the 25% tax category for ordinary income and 40% tax category for capital gain.  Total depreciation = 3,450,000 on additioanl equipment (AE) Compute the Terminal cash flow

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
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Rare Agri-Products Ltd. is considering a new project with a projected 
life of seven (7) years. The project falls under the government’s 
subsidy program for encouraging local agricultural products and is 
eligible for a one-time rebate of 25% on any initial equipment 
installed for the project. The initial equipment (IE) will cost 
$41,000,000. An additional equipment (AE) costing 
$3,500,000 will be needed at the end of year 3. At the end of seven 
(7) years, the original equipment, IE, will have no resale value but 
the supplementary equipment, AE, can be sold for $50,000. A working 
capital of $1,350,000 will be needed. 
The project is forecast to generate sales of agri-products over the 
seven years as follows: 
Year 1  
Year 2  
Years 3-5  
Years 6-7  
70,000 units 
100,000 units 
250,000 units 
325,000 units 
A sale price of $150 per unit for the first two years is expected and 
then decline to $90 per unit thereafter as the newness of the product 
loses some sheen. The variable expenses will amount to 30% of sales 
revenue. Fixed cash operating expenses will amount to $1,100,000 per 
year. 
The company falls in the 25% tax category for ordinary income and 40% 
tax category for capital gain

Total depreciation = 3,450,000 on additioanl equipment (AE)

Compute the Terminal cash flow

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