Use the following information for the next four questions: The Anti-Zombie Corporation is considering expanding one of its production facilities to research a new type of virus, which will hopefully not cause a future zombie outbreak. The project would require a $24,000,000 capital investment and will be depreciated (straight-line to zero) over its 3 year life. They know that they will be able to salvage $6,000,000 for the equipment at that time. Incremental sales are expected to be $16,000,000 annually for the 3 year period with costs (excluding depreciation) of 40% of sales. The company would also have to commit initial working capital to the project of $2,000,000. The company has a 30% tax rate, and requires a 15% rate of return for projects of this risk level.

Use the following information for the next four questions: The Anti-Zombie Corporation is considering expanding one of its production facilities to research a new type of virus, which will hopefully not cause a future zombie outbreak. The project would require a $24,000,000 capital investment and will be depreciated (straight-line to zero) over its 3 year life. They know that they will be able to salvage $6,000,000 for the equipment at that time. Incremental sales are expected to be $16,000,000 annually for the 3 year period with costs (excluding depreciation) of 40% of sales. The company would also have to commit initial working capital to the project of $2,000,000. The company has a 30% tax rate, and requires a 15% rate of return for projects of this risk level.

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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Assume that United Technologies is evaluating a proposal to change the company's manual design system to a computer-aided design (CAD) system. The proposed system is expected to save 10,000 design hours per year; an operating cost savings of $50 per hour. The annual cash expenditures of operating the CAD system are estimated to be $250,000. The CAD system requires an initial investment of $500,000. The estimated life of this system is five years with no salvage value. The tax rate is 40 percent. United Technologies has a cost of capital of 20 percent.Assume that management intends to use double-declining balance depreciation with a switch to straight-line depreciation (applied to any undepreciated balance) starting in Year 4.Determine the project's net present value
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