Question
Assume that initial investment in a project that will run for 4 years is $1200. This will be depreciated to a book value of Zero
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Assume that initial investment in a project that will run for 4 years is $1200. This will be depreciated to a book value of Zero over 4 years using straight line method.
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The net working capital is $70 which be recovered fully at end of the project in year.
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The incremental revenue from this project will be 1000 and the incremental costs of
operating this project will be $150 during the project.
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The warehouse for the project would otherwise fetch an annual rent of $100 if this
project is not accepted.
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$2000 is spent on research and development for the project.
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The equipment can be sold for a salvage value of $200 at the end of the project and the
shutdown costs associated with the project will be $80.
-
The cost of capital is 8%. Tax Rate is 30%.
i) Complete and provide the Table for Incremental Free Cash Flows. (8 marks)
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ii) Calculate NPV of Project Comfy Shoes. Should you accept or reject the project?
Why?
Assume that initial investment in a project that will run for 4 years is $1200. This will be depreciated to a book value of Zero over 4 years using straight line method.
The net working capital is $70 which be recovered fully at end of the project in year.
The incremental revenue from this project will be 1000 and the incremental costs of
operating this project will be $150 during the project.
The warehouse for the project would otherwise fetch an annual rent of $100 if this
project is not accepted.
$2000 is spent on research and development for the project.
The equipment can be sold for a salvage value of $200 at the end of the project and the
shutdown costs associated with the project will be $80.
The cost of capital is 8%. Tax Rate is 30%.
i) Complete and provide the Table for Incremental Free Cash Flows. (8 marks)
ii) Calculate NPV of Project Comfy Shoes. Should you accept or reject the project?
Why?
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