A project manager is evaluating whether it is economical to develop a project requiring expenditures at time zero of $200,000 for land, $300,000 for inventory working capital, $580,000 for a steel building, $240,000 for equipment, and $80,000 for vehicles. Starting in year one the manager estimates that production will generate annual end-of-year escalated revenue of $2,000,000 with escalated operating costs of $1,550,000. 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 convention. 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. The business will be sold for $4,000,000 at the end of the fourth year of operating the business. Write-off all remaining book values against the sale value. 1) Calculate the NPV for a 15% minimum rate of return, as well as the ROR, PVR, and BC Ratio. 2) Calculate the NPV assuming the 7-year and 5-year MACRS assets used Bonus Depreciation starting in year one. 3) Based on the original MACRS model, what is the breakeven business salve value in year four that will give you a 15% return on your investment? 0 1 2. 3 4 0.0% 0.0% 2,000.0 (1,550.0) 10.0% 10.0% 2,200.0 (1,705.0) 10.0% 10.0% 2,420.0 (1,875.5) Year Today's $ Converted to Escalated $ Annual Revenue Escalation Annual Operating Cost Escalation Revenue Operating costs Project Sale Value (Net Commission) Building Equipment Vehicle Land Working Capital 10.0% 10.0% 2,662.0 (2,063.1) 4,000.0 (580.0) (240.0) (80.0) (200.0) (300.0) A project manager is evaluating whether it is economical to develop a project requiring expenditures at time zero of $200,000 for land, $300,000 for inventory working capital, $580,000 for a steel building, $240,000 for equipment, and $80,000 for vehicles. Starting in year one the manager estimates that production will generate annual end-of-year escalated revenue of $2,000,000 with escalated operating costs of $1,550,000. 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 convention. 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. The business will be sold for $4,000,000 at the end of the fourth year of operating the business. Write-off all remaining book values against the sale value. 1) Calculate the NPV for a 15% minimum rate of return, as well as the ROR, PVR, and BC Ratio. 2) Calculate the NPV assuming the 7-year and 5-year MACRS assets used Bonus Depreciation starting in year one. 3) Based on the original MACRS model, what is the breakeven business salve value in year four that will give you a 15% return on your investment? 0 1 2. 3 4 0.0% 0.0% 2,000.0 (1,550.0) 10.0% 10.0% 2,200.0 (1,705.0) 10.0% 10.0% 2,420.0 (1,875.5) Year Today's $ Converted to Escalated $ Annual Revenue Escalation Annual Operating Cost Escalation Revenue Operating costs Project Sale Value (Net Commission) Building Equipment Vehicle Land Working Capital 10.0% 10.0% 2,662.0 (2,063.1) 4,000.0 (580.0) (240.0) (80.0) (200.0) (300.0)
