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Mr Bigg, the President of Big Capital Enterprises, has assembled his top advisers to evaluate an investment opportunity. The advisers expect the company to
Mr Bigg, the President of Big Capital Enterprises, has assembled his top advisers to evaluate an investment opportunity. The advisers expect the company to pay cash at the beginning of the investment and the after tax cash inflow for each of the following four years to be the following. $1,200,000 Year 1 $240,000 REQUIRED Year 2 $300,000 Year 3 $375,000 Mr Bigg agrees with his advisers that the company should use the discount rate (required rate of return) of 9% Year 4 $600,000 company's income tax rate is expected cash flow from this project. to compute net present value to evaluate the viability of the proposed project. 1. Compute the net present value of the proposed project. Should the company approve the project? One of the advisers, Vice President Miss Clever, doesn't beleive the cash flow forecast and he points out that the advisers failed to include depreciation on equipment used in this project when calculating the initial cash flows. The annual depreciation is expected to be $240,000 per year for the four-year period. The per year. Use this information to revise the company's 25% 2. Compute the net present value of the project based on the revised cash flow forecast which should include the depreciation tax benefit discovered. Should the company approve the project?
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