Your company is considering a project for which you oversee the analysis. The company has spent $100,000 on research & development leading up to the project. The projected income statements for this project are: Year Revenues 2 $500,000 $550,000 $605,000 $665,500 250,000 275,000 302,500 200,000 200,000 200,000 75,000 1 332,750 200,000 132,750 - Cost of Goods Sold |- Depreciation - EBIT 50,000 102,500 The project requires the capital expenditure of $1,000,000 today. At the end of the economic life of the project (i.e., year 4), the firm will salvage the book value (see table for the depreciation schedule). Non- cash working capital is anticipated to be 10% of the revenues and must be made at the beginning of each period. In the last period the firm will recover all investment in non-cash working capital. The firm faces a 37% marginal tax rate. The cost of capital is 10%.
Your company is considering a project for which you oversee the analysis. The company has spent $100,000 on research & development leading up to the project. The projected income statements for this project are: Year Revenues 2 $500,000 $550,000 $605,000 $665,500 250,000 275,000 302,500 200,000 200,000 200,000 75,000 1 332,750 200,000 132,750 - Cost of Goods Sold |- Depreciation - EBIT 50,000 102,500 The project requires the capital expenditure of $1,000,000 today. At the end of the economic life of the project (i.e., year 4), the firm will salvage the book value (see table for the depreciation schedule). Non- cash working capital is anticipated to be 10% of the revenues and must be made at the beginning of each period. In the last period the firm will recover all investment in non-cash working capital. The firm faces a 37% marginal tax rate. The cost of capital is 10%.
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
Related questions
Question
A. Estimate the
B. Compute the payback (using free cash flows) period for investors in the firm.
C. Compute the
Would you accept the project? Why or why not?
D. How will you incorporate this information in your existing analysis? Compute the new
FCF side costs and benefits. Calculate the new NPV and IRR. Would you accept the project?
Using A, B C with the first picture.
Transcribed Image Text:Your company is considering a project for which you oversee the analysis. The company has spent
$100,000 on research & development leading up to the project. The projected income statements for this
project are:
Year
1
2
3
4
$500,000 $550,000 $605,000
250,000
200,000
50,000
$665,500
332,750
200,000
Revenues
- Cost of Goods Sold
275,000
- Depreciation
= EBIT
200,000
75,000
302,500
200,000
102,500
132,750
The project requires the capital expenditure of $1,000,000 today. At the end of the economic life of the
project (i.e., year 4), the firm will salvage the book value (see table for the depreciation schedule). Non-
cash working capital is anticipated to be 10% of the revenues and must be made at the beginning of each
period. In the last period the firm will recover all investment in non-cash working capital. The firm faces a
37% marginal tax rate. The cost of capital is 10%.
Transcribed Image Text:After the initial analysis, you realized that the project creates both side costs and side benefits. The project
will create side costs of $10,000 every year (starting year 1) until the end of the project (these costs are
associated with using an existing factory). The project will also create an additional side benefit of 25,000
in year 1, increasing at 10% every year until the end of the project (the benefit derives from lowering costs
demand of other products produced by the company).
How will you incorporate this information in your existing analysis? Compute the new
FCF side costs and benefits. Calculate the new NPV and IRR. Would you accept the project?
Year
1
2
3
4
35,00087,500 10524130,ses IG6,025
252,833
FCF w/side costs and benefits
NPV
IRR
Acept because
ispositive
Decision
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