Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Ocean Tide Industries is planning to introduce a new product with a projected life of eight years. The project is in the governments preferred industry

Ocean Tide Industries is planning to introduce a new product with a projected life of eight years. The project is in the governments preferred industry list and qualifies for a one-time subsidy of $2,000,000 at the start of the project. Initial equipment (IE) will cost $14,000,000 and an additional equipment (AE) costing $1,000,000 will be needed at the end of year 2. At the end of 8 years, the original equipment, IE, will have no resale value but the supplementary equipment, AE, can be sold for its book value of $100,000. A working capital of $1,500,000 will be needed. The sales volume over the eight-year period have been forecast as follows: Year 1 80,000 units

Year 2 120,000 units Years 3-5 300,000 units Years 6-8 200,000 units

A sale price of $100 per unit is expected and the variable expenses will amount to 40% of sales revenue. Fixed cash operating expenses will amount to $1,600,000 per year. Additionally, an extensive advertising campaign will be launched, which will need annual expenses as follows: Year 1 $3,000,000 Year 2 $1,500,000 Years 3-5 $1,000,000 Years 6-8 $400,000

The company falls in the 50% tax category and believes 12% to be an appropriate estimate for its after-tax cost of capital for a project of this nature. All equipment is depreciated on a straight- line basis. In the event of a negative taxable income, the tax is computed as usual and is reported as a negative number, indicating a reduction in loss after tax. You are required to:

1. Compute the initial cash flow for the project 2 marks

2. Compute the earnings before taxes for years 1 through 8 2 marks

3. Compute the earnings after taxes for years 1 through 8 2 marks

4. Compute the OCF for years 1 through 8 2 marks

5. Compute the Terminal cash flow 1 mark

6. Compute the FCF for years 1 through 8 2 marks

7. Compute the NPV and IRR 3 marks

8. Should the project be accepted? 1 mark

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Essentials Of Corporate Financial Management

Authors: Glen Arnold

1st Edition

1405847042, 978-1405847049

More Books

Students also viewed these Finance questions