Question
Problem 3.1.A company is evaluating a new 5-year project. The project will result in salesof $500,000 each year for the next 5 years. The costs
Problem 3.1.A company is evaluating a new 5-year project. The project will result in salesof $500,000 each year for the next 5 years. The costs of production will be $300,000 eachyear. The project requires an initial purchase of equipment worth $400,000. The equipmentwill be depreciated to zero using the straight line method over its life of five years. Theequipment will be sold at a price of $50,000 at the end of five years. The project alsorequires net working capital of $50,000 for the first year. After that the net working capitalrequirement falls to $40,000 for years 2 to 5. Finally, no net working capital is needed inyear 6. The projections are based on a market research study conducted by a consulting firmfor which the company has already paid $10,000 to the consulting firm. The corporate taxrate is 20% and the discount rate for the project is 15%. Assume all cash flows for a year(including net working capital changes) occur at the end of year. What is the net presentvalue of the project? If the firm has 100,000 shares, how does taking the project affect sharevalue? use table or use another method to show your calculation.Problem 3.2.You are bidding for a contract in which you will maintain all computinginfrastructure for a firm for the next five years. Your bid specifies the annual price that youwill charge the firm for your services. You have already determined all the costs associatedwith providing the service. You first considered charging a price of $450,000 per year andcalculated NPV to be $60,000. What is the most competitive (lowest) bid you can place?The corporate tax rate is 20% and the discount rate is 12% per year.Problem 3.3.You calculated the Net Present Value (NPV) of a project to be $10,000.You realize that you forgot to include cash flows of a computer you need for the project.You will buy the computer immediately for $2,500. The computer will be depreciated usingMACRS schedule as a 5-year property and will be worthless after 5 years. Assume that thefirst depreciation is realized immediately. The marginal tax rate is 20%. The cost of capitalis 10%. Determine the incremental cash flows related to the computer, calculate their NPV,and calculate the corrected NPV of the project.
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