Temporary Housing Services Incorporated (THSI) is considering a project that involves setting up atemporary housing facility in an area recently damaged by a hurricane. THSI will lease space in this facilityto various agencies and groups providing relief services to the area. THSI estimates that this project willinitially cost $5 million to set up and will generate $20 million in revenues during its first and only year inoperation (paid in one year). Operating expenses are expected to total $12 million during this year and thecapital cost allowance will be another $3 million. THSI will require no working capital for this investment.THSI's marginal tax rate is 35%.Assume that THSI's cost of capital for this project is 15%. The net present value (NPV) of this temporaryhousing project is closest to:$435,000-$650,000$1,960,000-$435,000$1,250,000

When making capital budgeting choices, firms and investors frequently utilize net present value…

Answered: Temporary Housing Services Incorporated…

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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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…

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