Homework #10 (20 points) We will use this homework question again for HW#11, please keep a copy A venture capitalist is considering investing in the following project. From an economic viewpoint, would you recommend it? The business would require expenditures at time zero of $500,000 for land, $300,000 for inventory/working capital, $1,500,000 for a non-residential (commercial) building, $3,000,000 for equipment, and $360,000 for vehicles. Starting in year one it is estimated that production will generate annual end-of-year escalated revenue of $5,000,000 with escalated operating costs of $2,000,000. In the following years, it is estimated that revenues will escalate at 5% per year while operating costs will escalate 2% per year. At the end of year four, it is expected that all the assets and working capital can be sold for an escalated terminal value (Sale Value) of $6,000,000. Use straight-line depreciation over 39-years for the building cost starting in year one, neglect the impact from the mid-month convention, and take a full deduction in year one. Use 5-Year MACRS (table 7-3) depreciation for the vehicles and 7-Year MACRS for the equipment, starting the deduction in time period one with the half-year convention. Assume any sale value gain (or loss) would be accounted for as ordinary income. Carry any losses forward to be used against project income in the future years and apply the 80% limit if necessary. Write off the remaining tax book values against the sale value at the end of year four to compute the gain or loss from the sale. Determine the investment after-tax DCFROR (After Tax Rate of Retum), and NPV. Assume a 25% effective state and federal income tax rate. The investor is seeking an after-tax escalated dollar minimum DCFROR of 10%. Finally, recalculate the NPV and ROR with the following changes. 1) Use 100% Bonus Depreciation for the Equipment and Vehicles with the deduction occurring in the year the costs are incurred (Building will still be SL over 39 years) 21 Use the Expense Scenario. Assume your company has other income to utilizing negative taxable income in the year incurred