A project manager is evaluating whether it is economical to develop

a project requiring expenditures at time zero of $$20,000$ for land,

$$30,000$ for inventory working capital, $$80,000$ for a steel building,

$$240,000$ for equipment, and $$60,000$ for vehicles. Starting in year

one the manager estimates that production will generate annual

end$-$of$-$year escalated revenue of $$500,000$ with escalated operating

costs of $$300,000.$ Operating costs and revenue will both escalate

at a compound interest rate of $10\%$ per year beginning in year two.

Use straight$-$line depreciation over $39$ years for the building cost

starting in year one assuming $12$ months of service when computing

your allowable deduction in year one under the mid$-$month con$-$

vention. Use $7-$Year MACRS depreciation rates for the qualifying

equipment cost starting in year one with the half$-$year convention

and the $5-$Year MACRS rates for the vehicle cost, again, starting

in year one with the half$-$year convention. The effective combined

federal and state income tax rate is $25\%.$ No other income exists

against which to utilize deductions so carry any losses forward.

A$)$ Calculate the project cash flows for the first four years of

this business. Neglect any sale value and applicable write$-$

offs at the end of year four assuming the project would

continue.

B$)$ Calculate the project cash flows for the first four years of

this business and also consider the after$-$tax cash flow that

would be realized if the business were to be sold at the

end of year four for a sale value of $$600,000.$ Write off all

remaining tax book values at the end of year four to deter$-$

mine taxable gain $($or loss$)$ and treat the sale as ordinary

income. For a minimum after$-$tax rate of return of $15\%,$

calculate the overall project after$-$tax NPV$,$ DCFROR, and

PVR$.$