1. (6 pts) Momma Bear Company, show all work.

• A project requires an initial investment of $200,000and is expected to produce additional sales revenue of $125,000per year, which thereafter should grow at the rate of inflation. Costs of goods sold are estimated at61% of sales. It is expected that cashflows will carry on for 6 years.In year 7 the project will wind down, and revenue will be half of the year 6 amount.
• The project will require additional working capital of10% of sales. As working capital ramps up, charge of the year 1 value (5% of sales) in Year 0 and then apply the additional amount required each year.Simply apply the same growth rate as a use of cash. At the end of the project life, assume all the working capital is recovered in year 7.
• Momma Bear's public debt trades at8% and they estimate their cost of equity at14%, the debt/equity composition is40/60
• Momma Bear expects no salvage value
• Expect inflation to be 2%

Scenario One: Under the old tax law, corporate income taxes were 35% and assets could be depreciated on a modified accelerate cost recovery system (MACRS) schedule which permitted depreciation of 20%, 32%, 20%, 16% and 12% of the asset purchase cost in years 1-5 respectively.

Fill (only) these cells with yellow paint NPV (1 pt), and IRR (1 pt); no partial credit. (2pts)

Scenario Two: Under the new tax law, Momma Bear pays corporate taxes at a rate of 21% and - again under the new tax law - accelerated depreciation allows the depreciation of the entire initial investment for tax purposes in the first year

Fill (only) these cells with yellow paint: Cost of Capital (1 pt), NPV (1 pt), IRR (1 pt), no partial credit.(3 pts)

What was the impact of the new tax changes on the cost of capital, and the attractiveness of corporate investments?(one sentence, highlighted in yellow, 1 point)

Canvas tells me that you can submit a Word file and then submit an xls file.Once you submit the second, you won't see the first, but I will.