Question
Assume University of Michigan is evaluating whether it should invest $300,000,000 in this new innovation center in Detroit. The project would increase cash flows from
Assume University of Michigan is evaluating whether it should invest $300,000,000 in this new innovation center in Detroit. The project would increase cash flows from operations for 5 years. The investment will have no salvage value. U of M uses a 10% hurdle rate. Other information is given below and numbers are in thousands.
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| Year 1 | Year 2 | Year 3 | Year 4 | Year 5 |
| Cash inflow from operations (pre-tax) | $ 80,000 | $ 90,000 | $ 110,000 | $ 120,000 | $ 130,000 |
| Depreciation on tax return | 70,000 | 70,000 | 80,000 | 40,000 | 40,000 |
| Depreciation on financial statements | 60,000 | 60,000 | 60,000 | 60,000 | 60,000 |
| Net income from investment | 20,000 | 30,000 | 50,000 | 60,000 | 70,000 |
| PV Factor using 10% |
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Requirement 1: Input the PV Factors in the above schedule using 10% for years 1-5. These factors must be obtained from the present value tables in the text on page A-8. Use the 5 decimal places given in the table. (5 points).
Requirement 2: Compute the annual net after-tax cash inflows. We will use the alternative computations described on page 502 where we subtract the cash income tax payments from the cash inflows from operations. To start, we need to compute the annual cash income tax payments which are 21% of the cash inflow from operations less the tax return depreciation. Year 1 is done for you. Complete this schedule (5 points)
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| Year 1 | Year 2 | Year 3 | Year 4 | Year 5 |
| Cash inflow from operations (pre-tax) | $ 80,000 |
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| Depreciation on tax return | (70,000) |
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| Taxable income | 10,000 |
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| Tax rate | 21% |
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| Cash payment for income taxes | $ 2,100 |
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Make sure to show dollar signs on the first and last number of each column. Format and align your numbers with commas and underlines on all schedules.
Now that we know the cash payment for income taxes, we can compute the after-tax cash flows. Complete the schedule below (5 points)
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| Year 1 | Year 2 | Year 3 | Year 4 | Year 5 |
| Cash inflow from operations |
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| Cash payment for income taxes |
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| After-tax cash flows |
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https://detroit.curbed.com/detroit-development/2019/10/30/20939927/stephen-ross-dan-gilbert-michigan-innovation-center-detroit
https://detroitcenterforinnovation.com/
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