The company faces a 40% tax rate. What is the project's operating cash flow for the first year (t = 1)? 8.The Board of Directors of National Brewing Inc. is considering the acquisition of a new still. The still is priced at $600,000 but would require $60,000 in transportation costs and $40,000 for installation. The still has a useful life of 7 years but will be depreciated over its 5-year MACRS life. The applicable MACRS depreciation rates are 20%, 32%, 19%, 12%, 11%, and 6%. It is expected to have a salvage value of $10,000 at the end of 7 years. The still would increase revenues by $220,000 per year and increase annual operating costs by $20,000 per year. Additionally, the still would require a $30,000 increase in net operating working capital. The firm's marginal tax rate is 40%, and the project's cost of capital is 10%. a. What is the initial investment outlay for the project, that is, what is the Year 0 project cash flow? b. What are the project's annual cash flows in Years 1, 2, 3, 4, 6, and 7? c. What is the project's NPV?
The company faces a 40% tax rate. What is the project's operating cash flow for the first year (t = 1)? 8.The Board of Directors of National Brewing Inc. is considering the acquisition of a new still. The still is priced at $600,000 but would require $60,000 in transportation costs and $40,000 for installation. The still has a useful life of 7 years but will be depreciated over its 5-year MACRS life. The applicable MACRS depreciation rates are 20%, 32%, 19%, 12%, 11%, and 6%. It is expected to have a salvage value of $10,000 at the end of 7 years. The still would increase revenues by $220,000 per year and increase annual operating costs by $20,000 per year. Additionally, the still would require a $30,000 increase in net operating working capital. The firm's marginal tax rate is 40%, and the project's cost of capital is 10%. a. What is the initial investment outlay for the project, that is, what is the Year 0 project cash flow? b. What are the project's annual cash flows in Years 1, 2, 3, 4, 6, and 7? c. What is the project's NPV?
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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Transcribed Image Text:The company faces a 40% tax rate. What is the project's operating cash flow for the first year (t = 1)?
8.The Board of Directors of National Brewing Inc. is considering the acquisition of a new still. The still
is priced at $600,000 but would require $60,000 in transportation costs and $40,000 for installation. The
still has a useful life of 7 years but will be depreciated over its 5-year MACRS life. The applicable
MACRS depreciation rates are 20%, 32%, 19%, 12%, 11%, and 6%. It is expected to have a salvage
value of $10,000 at the end of 7 years. The still would increase revenues by $220,000 per year and
increase annual operating costs by $20,000 per year. Additionally, the still would require a $30,000
increase in net operating working capital. The firm's marginal tax rate is 40%, and the project's cost of
capital is 10%.
a. What is the initial investment outlay for the project, that is, what is the Year 0 project cash flow?
b. What are the project's annual cash flows in Years 1, 2, 3, 4, 6, and 7?
c. What is the project's NPV?
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