Fundamentals of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
9th Edition
ISBN: 9781259722615
Author: Richard A Brealey, Stewart C Myers, Alan J. Marcus Professor
Publisher: McGraw-Hill Education
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Chapter 9, Problem 34QP
Summary Introduction
To determine:
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The following table presents sales forecasts for Golden Gelt Giftware. The unit price is $30. The unit cost of the giftware is $25.
Year
Unit Sales
20, 000
2.
31, 200
14, 900
5, 700
Thereafter
It is expected that net working capital will amount to 25% of sales in the following year. For example, the store will need an initial (year
0) investment in working capital of 0.25 x 20,000 x $30 = $150,000. Plant and equipment necessary to establish the giftware business
will require an additional investment of $197,000. This investment will be depreciated in an asset class with a CCA rate of 25%. We will
assume that the firm has other assets in this asset class. After 4 years, the equipment will have an economic and book value of zero.
The firm's tax rate is 35%. The discount rate is 10%.
What is the net present value of the project? (Round your answer to the nearest whole dollar amount.)
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
Unit Sales
1
22,000
2
30,000
3
14,000
4
5,000
Thereafter
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 0) investment in working capital of 0.20 × 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 using MACRS and a 3-year life. 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? (Do not round intermediate calculations. Round your answer to the nearest whole dollar amount.)
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…
Chapter 9 Solutions
Fundamentals of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 9 - Prob. 1QPCh. 9 - Prob. 2QPCh. 9 - Prob. 3QPCh. 9 - Prob. 4QPCh. 9 - Prob. 5QPCh. 9 - Prob. 6QPCh. 9 - Prob. 7QPCh. 9 - Prob. 8QPCh. 9 - Prob. 10QPCh. 9 - Prob. 12QP
Ch. 9 - Prob. 13QPCh. 9 - Prob. 14QPCh. 9 - Prob. 15QPCh. 9 - Prob. 17QPCh. 9 - Prob. 20QPCh. 9 - Prob. 21QPCh. 9 - Prob. 22QPCh. 9 - Prob. 23QPCh. 9 - Prob. 24QPCh. 9 - Prob. 25QPCh. 9 - Prob. 26QPCh. 9 - Prob. 27QPCh. 9 - Prob. 28QPCh. 9 - Prob. 29QPCh. 9 - Prob. 30QPCh. 9 - Prob. 32QPCh. 9 - Prob. 34QP
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- 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 8 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 0) 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. The firm's tax rate is 30%. The discount rate is 20%. 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 NPVarrow_forwardThe 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 0) investment in working capital of 0.20 x 22,000 x $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…arrow_forwardThe 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 × 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. The firm's tax rate is 30%. The discount rate is 20%. 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 $ 284,622arrow_forward
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