JCC Network (JCC) is a fast-growing Internet service provider that initially went public in 2010. Its revenue growth and profitability have steadily risen since the companys inception in early 2000. JCC is considering a new project of extending its services to rural area. If the company carries out the project, it needs to purchase a new machine that costs $720,000. For tax purposes, the machine will be fully depreciated by the simplified straight-line method over a period of three years. It is estimated that the machine will be able to generate $580,000 in incremental sales and the annual cash expenses of the company will increase by $150,000. Besides, the company will need $180,000 in initial net working capital for the project. As the new machine requires more space, the company will make use of a warehouse, which is currently rented out for $60,000 per year.

In addition, the average tax rate, the marginal tax rate, and the required rate of return for the company are 20%, 30% and 10% respectively. As a finance manager of the company, you are required to evaluate this project.

Required:

Assignment File 9

a.

b. c.

Discuss whether or not the following items are relevant cash flows for the project and should be included in the capital budgeting.

1. the rental income of the warehouse

2. the initial net working capital of the project

3. the annual depreciation of the machine

(6 marks) (6 marks) (8 marks)

Determine the annual after-tax cash flows associated with this project for years 0 through 3. You need to show your steps clearly in order to get full marks. (20 marks)

Perform a capital budgeting analysis to determine whether the company should accept the project. You need to show your steps clearly in order to get full marks. (10 marks)