Question
Drillers, Inc., is evaluating a project to produce a high-tech deep-sea oil exploration device. The investment required is $80 million for a plant with a
Drillers, Inc., is evaluating a project to produce a high-tech deep-sea oil exploration device. The investment required is $80 million for a plant with a capacity of 15,000 units a year for 5 years. The device will be sold for a price of $12,000 per unit. Sales are expected to be 12,000 units per year. The variable cost is $7,000 and fixed costs, excluding depreciation, are $25 million per year. Assume Drillers employs straight-line depreciation on all depreciable assets, and assume that they are taxed at a rate of 36%. If the required rate of return is 12%, what is the approximate NPV of the project?
The answer doesn't factor in the depreciation tax shield for this problem, so I was wondering if that is correct? If so why wouldn't the tax shield be factored in here?
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