Question
Companies invest in expansion projects with the expectation of increasing the earnings of its business. Consider the case of ABC Company: Year 1 Year 2
Companies invest in expansion projects with the expectation of increasing the earnings of its business. Consider the case of ABC Company:
|
| Year 1 | Year 2 | Year 3 | Year 4 |
| Unit sales | 10,000 | 15,000 | 15,000 | 16,000 |
| Sales price | $23 | $24 | $24.50 | $25 |
| Variable cost per unit | $10 | $11 | $12 | $13 |
| Fixed operating costs | $40,000 | $42,000 | $45,000 | $46,000 |
This project will require an investment of $20,000 in new equipment. Under the new tax law, the equipment is eligible for 100% bonus deprecation at t = 0, so it will be fully depreciated at the time of purchase. The equipment will have no salvage value at the end of the projects four-year life. ABC pays a constant tax rate of 25%, and it has a weightedaverage cost of capital (WACC) of 9.5%.
A) Using a table, calculate the projects free cash flows at t=0 and for years 1 through 4
*PLEASE SHOW ALL THE CALCULATIONS
B) What is the projects net present value (NPV) under the new tax law?
*PLEASE SHOW ALL THE CALCULATIONS
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Case Studies In Finance
Authors: Robert F. Bruner
4th Edition
0072338628, 978-0072338621
