Question
Examine the below project: Tutoring Business Project Data Project life Perpetual Initial investment in computer hardware and software $210k Depreciation and amortisation of above pa
Examine the below project:
Tutoring Business Project Data | |
Project life | Perpetual |
Initial investment in computer hardware and software | $210k |
Depreciation and amortisation of above pa | $30k |
Unit sales at end of each year | 5k hours |
Sale price per unit at end of each year | $90/hour |
Variable cost per unit at end of each year | $60/hour |
Manager salary pa, paid in arrears | $120k |
Discount rate (WACC after tax) | 7.7% pa |
Tax rate | 30% |
Note 1: The computer hardware and software can be depreciated or amortised straight line over 7 years to zero, hence the $30k depreciation pa over the first 7 years.
Note 2: Initially (t=0) you expect an increase of $300k in your accounts payable (current liability) and $200k in accounts receivable (current asset). The accounts payable and receivable is expected to grow or shrink at the same rate as revenues after that.
Note 3: The business is expected to operate forever and the projects year 1 cash flows will be constant every year onwards. This is because the unit sales, sale price, variable cost, managers salary and working capital requirements are expected to be constant forever. Also, no further CapEx is expected after the initial investment.
Note 4: This firm is all-equity financed, it has no leverage.
Which of the below statements is NOT correct? The firm's
Select one:
a.
Initial operating free cash flow (OFCF0) is -110k.
b.
Profits (NPAT) and OFCF are zero for the first 7 years (t=1 to t=7).
c.
Profits (NPAT) and OFCF are 21k from year 8 (t=8) onwards.
d.
Project NPV is 210k, rounded to the nearest thousand.
e.
Payback period is 13 years.
ALL INFORMATION IS PROVIDED
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