I need a step by step to figure out how to answer this problem Project Details Management is analyzing this project over a 5 year horizon Perstorps marginal tax rate is 50 A suitable piece of land on which to build the factory can be purchased immediately for essentially zero cost The land is expected to have no value at the end of the projects life A factory building can be constructed immediately for a cost of $50m The IRS requires the factory to be depreciated over 25 years using straight line depreciation (i e , at a rate of $2m per year) The building is expected to have a market value of $20m at the end of the projects life Perstorp currently owns used equipment which can be installed in the factory immediately This equipment is being depreciated by $10m each year and now has a book value of $40m but it could be sold today for $50m It is expected to have zero market value at the end of the projects life This equipment would fill 50 of the factorys square footage Management would spend $50m in two years (i e , at Year 2) to fill the other half of the factory with equipment (Management estimates that many customers will require 2 years to collect on their hurricane insurance policies and plan new homes ) The IRS places this equipment in the 3 year MACRS life class, which has the following depreciation percentages year 1, 0 2 year 2, 0 4 year 3, 0 2 year 4, 0 2 This equipment is expected to have a market value of $20m at the end of the projects life Management expects sales revenues of $300m in each of years 1 and 2, and $600m in each of years 3 and 4 Management expects sales revenue to drop to $500m in year 5 The cost of goods sold is 90 of sales revenue Management will spend $54m immediately to acquire inventories of raw materials needed to start production This is 20 of coming year cost of goods sold At the end of each year in the projects life the factory must have inventories equal to 20 of coming year cost of goods sold This inventory investment will be recaptured at the end of the projects life Put Your Name Here Year 0 1 2 3 4 5 MACRS depreciation Income Statement Sales COGS Dep (equipment, year o) Dep (equipment, year 2) Dep (building) EBIT (Tax rate 50 ) NI Year 0 1 4 5 Balance Sheet (Asset Side) INV Equipment, year o Equipment, year 2 Building Memo After tax Cash Flow, ATCF MV (MV BV)T Year MV Equipment, year o 0 50 Equipment, year 2 Building BV 40 50 ATCF 45 1 Year 0 2 3 4 5 Project Cash Flow EBIT Depreciation CTAX OCF inNWC NCS Equiptment, year o Equiptment, year 2 Buidling After tax Cash Flow

The Answer is in the image, click to view ...

Answered step by step

Verified Expert Solution

Link Copied!

Question

1 Approved Answer

Posted on Oct 19, 2024

I need a step by step to figure out how to answer this problem: Project Details Management is analyzing this project over a 5-year horizon.

I need a step by step to figure out how to answer this problem:

Project Details

Management is analyzing this project over a 5-year horizon.
Perstorps marginal tax rate is 50%.
A suitable piece of land on which to build the factory can be purchased immediately for essentially zero cost.

The land is expected to have no value at the end of the projects life.
A factory building can be constructed immediately for a cost of $50m. The IRS requires the factory to be

depreciated over 25 years using straight-line depreciation (i.e., at a rate of $2m per year). The building is

expected to have a market value of $20m at the end of the projects life.
Perstorp currently owns used equipment which can be installed in the factory immediately. This equipment is

being depreciated by $10m each year and now has a book value of $40m but it could be sold today for $50m. It is expected to have zero market value at the end of the projects life. This equipment would fill 50% of the factorys square footage.
Management would spend $50m in two years (i.e., at Year 2) to fill the other half of the factory with equipment. (Management estimates that many customers will require 2 years to collect on their hurricane insurance policies and plan new homes.) The IRS places this equipment in the 3-year MACRS life class, which has the following depreciation percentages: year 1, 0.2; year 2, 0.4; year 3, 0.2; year 4, 0.2. This equipment is expected to have a market value of $20m at the end of the projects life.
Management expects sales revenues of $300m in each of years 1 and 2, and $600m in each of years 3 and 4. Management expects sales revenue to drop to $500m in year 5. The cost of goods sold is 90% of sales revenue.
Management will spend $54m immediately to acquire inventories of raw materials needed to start production.

This is 20% of coming-year cost-of-goods-sold. At the end of each year in the projects life the factory must have inventories equal to 20% of coming-year cost-of-goods-sold. This inventory investment will be recaptured at the end of the projects life.

image text in transcribed

Put Your Name Here Year: 0 1 2 3 4 5 MACRS depreciation Income Statement Sales -COGS - Dep (equipment, year o) Dep (equipment, year 2) -Dep (building) = EBIT (Tax rate: 50%) = NI Year: 0 1 4 5 Balance Sheet (Asset Side) INV Equipment, year o Equipment, year 2 Building Memo: After-tax Cash Flow, ATCF = MV - (MV - BV)T Year MV Equipment, year o 0 50 Equipment, year 2 Building BV 40 50% ATCF 45 1: Year: 0 2 3 4 5 Project Cash Flow |EBIT Depreciation -CTAX =OCF - inNWC -NCS Equiptment, year o Equiptment, year 2 Buidling After-tax Cash Flow