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HMS Corporation Is Considering an Expansion Project That Requires Investment

question 100

Essay

HMS Corporation is considering an expansion project that requires investment in capital assets of $545,000,costs of $15,000 to modify the assets before they can be put into operation,and additional raw materials inventory of $50,000 to support the project.In addition,HMS had spent $25,000 to study the viability of this project.The one-time after-tax opportunity costs associated with this project are $36,000.The project is expected to generate operating revenue of $600,000 per year,and the associated operating expenses are estimated at $275,000 per year.The capital assets belong to asset class 9,which has a CCA rate of 30 percent.The assets are expected to sell for $42,000 when the project terminates in eight years.Assume the asset class remains open after the project terminates.The firm's cost of capital is 14 percent and marginal tax rate is 40 percent.
A) What is the initial after-tax cash flow?
B) What is the present value of the CCA tax savings?
C) What is the present value of the after-tax operating cash flows?
D) What is the ending after-tax cash flow?
E) What is the NPV of the project?

Definitions:

Contract

A legally binding agreement between two or more parties that outlines obligations each party must perform.

Authority

Refers to the right or power assigned to an individual or entity to make decisions, give orders, or control something or someone.

Reimbursement

A repayment for money spent or losses incurred, often from one party to another as compensation.

Independent Contractor

An individual or entity contracted to perform work for another entity as a non-employee, responsible for their own tax obligations and not subject to the hiring entity’s control over how the work is performed.