Fundamentals Of Corporate Finance, 9th Edition
9th Edition
ISBN: 9781260052220
Author: Richard Brealey; Stewart Myers; Alan Marcus
Publisher: McGraw-Hill Education
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Chapter 10, Problem 15QP
a)
Summary Introduction
To discuss: Whether the accounting break-even sales will increase or decrease.
b)
Summary Introduction
To discuss: Whether the
c)
Summary Introduction
To discuss: Whether the part (a) or part (b) is important and whether it is attractive to switch the project to MACRS.
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A firm wants to invest in a project whose financial information is below. The tax rate is 30%, and the MARR (Minimum Attractive Rate of Return) is 16%. Answer the following questions based on the information given in the table.
Initial investment cost (TL)
155,000
Operating expenses (TL/year)
42,000
General maintenance cost (TL) (end of 3rd year)
26,500
Income (TL/year)
65,000
Salvage value (TL)
41,000
Economic life (year)
5
Taking into account the net cash flows of the project after tax;
a) Calculate the annual depreciation amount required by the company for the project using the straight-line (SL) depreciation method.
b) What is the project's net cash flow amount in the initial period?
c) What is the project’s net cash flow amount in the operating periods?
d) What is the project's net cash flow amount in the last period?
e) Calculate the Net Present Value of the project and evaluate it from an economic point of view.
A project will cost $30 in year 1 and generate earnings before interest, taxes and depreciation of $20 in year 1, $15 in year 2 and $10 in year 3. The inital cost is to be linearly depreciated over three years.
The company has a marginal corporate income tax rate of 21% and the appropriate unlevered cost of capital for the project is 12%.
a: What is the NPV of the project if the firm is all equity-financed?
b: What is the APV of the project if the firm uses $30 debt finance in the first year at an expected rate of return of 5%? The company will pay interest in years 2 and 3 and pay off the loan in year 3
What is the NPV of project D? Assume that the firm requires a minimum after-tax return of 8% on investment.
Project D costs $5,000 and will generate sales of $4,000 each year for 5 years. The cash expenditures will be $1,500 per year. The firm uses straight-line depreciation with an estimated salvage value of $500 and has a tax rate of 25%.
(2) What is the book rate of return based on the average book value? (Round your answer to 2 decimal places.)
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Fundamentals Of Corporate Finance, 9th Edition
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