You are trying to determine the initial investment to replace an old Equipment with a new. The proposed equipment’s purchase price is 65,000, and an additional 15,000 will be necessary to install it. It will be depreciated under Modified Accelerated Cost Recovery System for Depreciation (MACRS) using a 3-year recovery period. This equipment has a salvage value of 23,000. The equipment requires an initial increase in net working capital of 20,000. While operation, the equipment will generate 40,000 in revenue and will cost 5,000 to operate in the first year. Inflation is 2.5%. revenue, operating cost, and required working capital will increase by the rate of inflation for year 2 and 3. If The firm pays taxes at a rate of 40% and the firm’s weighted Average cost of capital (WACC) is 12%. Should you invest in the project?
You are trying to determine the initial investment to replace an old Equipment with a new. The proposed equipment’s purchase price is 65,000, and an additional 15,000 will be necessary to install it. It will be depreciated under Modified Accelerated Cost Recovery System for Depreciation (MACRS) using a 3-year recovery period. This equipment has a salvage value of 23,000. The equipment requires an initial increase in net working capital of 20,000. While operation, the equipment will generate 40,000 in revenue and will cost 5,000 to operate in the first year. Inflation is 2.5%. revenue, operating cost, and required working capital will increase by the rate of inflation for year 2 and 3. If The firm pays taxes at a rate of 40% and the firm’s weighted Average cost of capital (WACC) is 12%. Should you invest in the project?
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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You are trying to determine the initial investment to replace an old Equipment with a new. The proposed equipment’s purchase price is 65,000, and an additional 15,000 will be necessary to install it. It will be depreciated under Modified Accelerated Cost Recovery System for Depreciation (MACRS) using a 3-year recovery period. This equipment has a salvage value of 23,000. The equipment requires an initial increase in net working capital of 20,000. While operation, the equipment will generate 40,000 in revenue and will cost 5,000 to operate in the first year. Inflation is 2.5%. revenue, operating cost, and required working capital will increase by the rate of inflation for year 2 and 3. If The firm pays taxes at a rate of 40% and the firm’s weighted Average cost of capital (WACC) is 12%. Should you invest in the project?
Transcribed Image Text:Year 0
YI
Y2
Y3
Y4
Fixed Asset Investment
Working Capital (inventory)
NWC (% of sales)
Change in working capital
Investment
Revenue
Operating expense
Depreciation
Operating income before taxes
(EBIT)
Taxes (40%)
EBIT (1- T)
Add: Depreciation
Net Operating Cash Flow
Terminal cash flow or
Recovery of working capital
investment
Total project cash flow
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