Question
Prob 1: Do not work on problem 1. I would you to work on problem 2 You have been given the following information on a
Prob 1: Do not work on problem 1. I would you to work on problem 2
You have been given the following information on a
project:
It has a five-year lifetime
The initial investment in the project will be $25 million, and the investment will be depreciated straight line, down to a salvage value of $10 million at the end of the fifth year.
The revenues are expected to be $20 million next year and to grow 10% a year after that for the remaining four years.
The cost of goods sold, excluding depreciation, is expected to be 50% of revenues.
The tax rate is 40%.
Estimate the pretax return on capital, by year and
on average, for the project.
Estimate the after-tax return on capital, by year and on average, for the project.
If the firm faced a cost of capital of 12%, should it take this project?
Prob 2:
Now assume that the facts in Problem 1 remain un- changed except for the depreciation method, which is switched to an accelerated method with the following de- preciation schedule:
Year % of Depreciable Asset
1 40
2 20
3 14.4
4 13.3
5 13.3
Depreciable asset = Initial investment Salvage value
Estimate the pretax return on capital, by year and
on average, for the project.
Estimate the after-tax return on capital, by year and on average, for the project.
If the firm faced a cost of capital of 12%, should it take this project?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started