Exhibit 9-1 A Project Requires an Initial Investment in Equipment and Machinery

question 36

Multiple Choice

Exhibit 9-1
A project requires an initial investment in equipment and machinery of $10 million. The equipment is expected to have a 5-year lifetime with no salvage value and will be depreciated on a straight-line basis. The project is expected to generate revenues of $5.1 million each year for the 5 years and have operating expenses (not including depreciation) amounting to 1/3 of revenues.
-Refer to Exhibit 9-1.Assume the tax rate is 40%,and the cost of capital is 10%.What is the present value of cash inflows from year 1 to year 5? What percentage of this present value is attributed to the tax benefits accruing from depreciation?

• A) $12.89m; 24%
• B) $10.77m; 28%
• C) 3.18m; 95%
• D) 7.73m; 39%
• E) $10.77m; 24%

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Definitions:

Overstate Cash Inflows

The act of exaggerating or reporting higher amounts of money coming into a business than what is actually being received, which can lead to a misleading financial position.

Terminal Values

In finance, the calculated value of a business or project beyond the forecast period when future cash flows can be estimated.

Project Approval

The process of gaining formal consent to proceed with a project, typically involving an assessment of its feasibility and potential impact.

After-Tax Cash Flow

The amount of cash a company has left after it has paid taxes, often used to determine a project's or investment's viability.