Question
A company is considering a three-year project. New equipment will cost $200,000. The equipment falls in the MACRS three-year class (.3333, .4445, .1481, .0741) it
A company is considering a three-year project. New equipment will cost $200,000. The equipment falls in the MACRS three-year class (.3333, .4445, .1481, .0741) it will have a salvage value at the end of the Project of $50,000. The project is expected to produce sales of $100,000 in the first year and sales will increase by $50,000 each year after that. Expenses are expected to be 40% of sales. An investment in net-working capital of $5000 is required at the beginning of the project. In year 2, net working capital must be increased by $10,000. All net-working capital will be recovered in the final year. The tax rate is 30%. The company is funded with 40% debt with a yield of 7% and 60% equity with a required return of 15%.
A. What are the annual depreciation expenses and the after-tax salvage value of the machine?
B. What is the OCF for each of the three years?
C. What are the total cash flows for years 0-3?
D. What is the company's hurdle rate?
E. What is the NPV? IRR? Profitability Index? Show work.
F. Should the company invest in the project?
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