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Please do not use excel and show your work (25 pts) 1. A project requires an initial investment of $12,000,000. The life of the project
Please do not use excel and show your work
(25 pts) 1. A project requires an initial investment of $12,000,000. The life of the project is 3 years. The $12,000,000 investment will be depreciated using the three-year modified accelerated cost recovery system (MACRS) class (see table below). The firm estimates that, in the first year, the revenues and total production costs will be $50,000,000 and $40,000,000, respectively, in nominal terms. After that the sales and production costs are expected to increase at the inflation rate of 4 percent per year over the life of the project. In addition, it has a before-tax salvage value (or resale value) at the end of the project of $2,000,000. The project also has an initial net working capital requirement of $1,200,000, which is fully recoverable when the project ends. The tax rate is 25 percent. The project only depreciates the $12,000,000 initial cost. The salvage value is excluded from depreciation. a) Find the operating cash flow (OCF) of this project for each year. b) If the real discount rate (or required rate of return) of the project is 20 percent, what is its net present value (NPV)? Year MACRS Depreciation Allowances for 3-year Recovery Period Class 1 2 3 4 AN 33.33% 44.44% 14.82% 7.41%Step by Step Solution
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