Question
10. XYZ Co. previously paid a consulting company $100 to analyze whether it should increase production and, based on that analysis, has decided to go
10. XYZ Co. previously paid a consulting company $100 to analyze whether it should increase production and, based on that analysis, has decided to go ahead with the project. The new project requires new equipment with a cost of $1,900, with shipping and installation expenses of $500. A $300 increase in net working capital is also necessary. XYZ Co expects the project to last for three years, at which point the equipment will have a book value and salvage value of $0. XYZ Co uses straight-line depreciation. The new equipment will generate $1,800 in sales revenue (every year starting at t= 1 and continuing without growth in years 2 and 3). Variable operating costs are expected to be 50% of the revenues from sales. The tax rate is 40% and the projects WACC is estimated to be 4%. SHOW YOUR WORK. Place answers in the table provided.
t=0 | t=1 | t=2 | t=3 | |
OCF | ||||
NCS | ||||
NWC | ||||
CFFA |
a. Find the OCF for at t= 1, 2 and 3. Record in the table provided. Show your work.
b. Find net capital spending (NCS) at t= 0, 1, 2, and 3
c. Find the change in net working capital (NWC) at t=0, 1, 2 and 3.
d. What is the NPV of this project if the discount rate is 10%
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started