Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

A company estimates 16,500 units of a new product could be sold annually over the next 8 years at a price of $23,500 each. Variable

A company estimates 16,500 units of a new product could be sold annually over the next 8 years at a price of $23,500 each. Variable cost per unit is $19,700 and fixed costs total $31 million per year. Start-up costs include $80 million to build production facilities, $4.50 million in land, and $15 million in net working capital. The $80 million facility is made up of a building valued at $12 million and $68 million of equipment. The building and equipment qualify for CCA rates of 4% and 20%, respectively. At the end of the project's life, the facilities (including the land) will be sold for an estimated $19.80 million. Assume the building's portion of this value will be $6.50 million and the value of the land remains unchanged. Start-up would also require initial expenses of $3.10 million, which are tax deductible. The company pays taxes at a 33% rate and uses a 16% discount rate on projects such as this one.

1. What is the cash flow in year 0?

2. What is the annual after-tax cash flow excluding the depreciation tax shield in the middle years of the project's life (i.e. in years 1-7)?

3. What is the after-tax cash flow excluding the depreciation tax shield in year 8?

4. What is the present value of the CCA Tax Shield of the building and the manufacturing equipment.

5. What is the NPV of the project?

6. Should the company accept the project?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

To calculate the various cash flows and financial metrics for the project well break down the information provided step by step 1 Cash flow in year 0 The cash flow in year 0 includes startup costs ini... blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Fundamentals of Corporate Finance

Authors: Stephen A. Ross, Randolph W. Westerfield

8th Canadian Edition

978-0071051606

More Books

Students also viewed these Finance questions

Question

Set standards.? K-526

Answered: 1 week ago