A Firm Is Considering a Project That Requires an Initial

question 89

Essay

A firm is considering a project that requires an initial investment of $300,000 in new equipment, which has a five-year life and a CCA rate of 30%.An initial investment in raw materials inventory of $50,000 is also required to support the project, which will rise to 15% of sales.The project will generate sales revenue of $400,000 in the first year, which will grow at 4% per year.Variable costs will be $220,000 for the first year, which will grow at 6% per year.The project's fixed costs are $40,000 per year.The expected salvage value of the asset is $45,000 at the end of five years.The firm's marginal tax rate is 40% and required return is 12.5%.Assume the asset class remains open after the project terminates and the half-year rule will apply in the first year.
a)What is the present value of the CCA tax savings?
b)What is the present value of the after-tax operating cash flow?
c)What is the present value of the change in net working capital?
d)What is the NPV of the project?

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Definitions:

Divisional Operating Income

The earnings generated from the operations of a specific division within a company, excluding expenses and revenues not directly related to the division's core operations.

Top Management

Refers to the highest level of managerial staff responsible for the overall strategy and performance of an organization.

Investment Turnover

The ratio that measures the efficiency of a company's use of its investments in generating sales or revenue.

Sales To Invested

This term might be referring to the ratio or measure of how effectively a company's invested capital is used to generate sales, but without a standard definition, it cannot be definitively explained.