The following table presents sales forecasts for Golden Gelt Giftware. The unit price is $40. The unit cost of the giftware is $25. Year 1 2 3 4 Thereafter Unit Sales 22,000 30,000 14,000 5,000 0 It is expected that net working capital will amount to 20% of sales in the following year. For example, the store will need an initial (Yea 0) investment in working capital of 0.20 × 22,000 × $40 = $176,000. Plant and equipment necessary to establish the giftware busines will require an additional investment of $200,000. This investment will be depreciated straight-line over 3 years. After 4 years, the equipment will have an economic and book value of zero. The firm's tax rate is 30%. The discount rate is 20%. Use the MACRS depreciation schedule. a. What is the net present value of the project? Note: Do not round intermediate calculations. Round your answer to the nearest whole dollar amount. b. By how much does NPV increase if the firm takes immediate 100% bonus depreciation? a. Net present value b. Increase in NPV
The following table presents sales forecasts for Golden Gelt Giftware. The unit price is $40. The unit cost of the giftware is $25. Year 1 2 3 4 Thereafter Unit Sales 22,000 30,000 14,000 5,000 0 It is expected that net working capital will amount to 20% of sales in the following year. For example, the store will need an initial (Yea 0) investment in working capital of 0.20 × 22,000 × $40 = $176,000. Plant and equipment necessary to establish the giftware busines will require an additional investment of $200,000. This investment will be depreciated straight-line over 3 years. After 4 years, the equipment will have an economic and book value of zero. The firm's tax rate is 30%. The discount rate is 20%. Use the MACRS depreciation schedule. a. What is the net present value of the project? Note: Do not round intermediate calculations. Round your answer to the nearest whole dollar amount. b. By how much does NPV increase if the firm takes immediate 100% bonus depreciation? a. Net present value b. Increase in 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
Section: Chapter Questions
Problem 1PS
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Cost of Debt, Cost of Preferred Stock
This article deals with the estimation of the value of capital and its components. we'll find out how to estimate the value of debt, the value of preferred shares , and therefore the cost of common shares . we will also determine the way to compute the load of every cost of the capital component then they're going to estimate the general cost of capital. The cost of capital refers to the return rate that an organization gives to its investors. If an organization doesn’t provide enough return, economic process will decrease the costs of their stock and bonds to revive the balance. A firm’s long-run and short-run financial decisions are linked to every other by the assistance of the firm’s cost of capital.
Cost of Common Stock
Common stock is a type of security/instrument issued to Equity shareholders of the Company. These are commonly known as equity shares in India. It is also called ‘Common equity
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Pm.10
Transcribed Image Text:The following table presents sales forecasts for Golden Gelt Giftware. The unit price is $40. The unit cost of the giftware is $25.
Year
1
2
3
4
Thereafter
Unit Sales
22,000
30,000
14,000
5,000
0
It is expected that net working capital will amount to 20% of sales in the following year. For example, the store will need an initial (Year
O) investment in working capital of 0.20 x 22,000 × $40 = $176,000. Plant and equipment necessary to establish the giftware business
will require an additional investment of $200,000. This investment will be depreciated straight-line over 3 years. After 4 years, the
equipment will have an economic and book value of zero. The firm's tax rate is 30%. The discount rate is 20%. Use the MACRS
depreciation schedule.
a. What is the net present value of the project?
Note: Do not round intermediate calculations. Round your answer to the nearest whole dollar amount.
b. By how much does NPV increase if the firm takes immediate 100% bonus depreciation?
a. Net present value
b. Increase in NPV
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