Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Scenario: Your childhood friend is considering buying a Nebraska ranch and is seeking your financial expertise. She estimates that all of the equipment and land

image text in transcribed
image text in transcribed
Scenario: Your childhood friend is considering buying a Nebraska ranch and is seeking your financial expertise. She estimates that all of the equipment and land will have an initial cost as provided in your spreadsheet. Your friend estimates it will generate revenues the first year but will also have associated costs as shown. Both sales and costs will grow with expected inflation, the rate of which is provided to you. Your friend only wants to keep the ranch for a finite number of years, at which point it will be sold for an estimated "salvage value." Due to your advice, your friend decides to depreciate using the MACRS 7-year schedule, which uses the following factors: 14.29%, 24.49%, 17.49%, 12.49%, 8.93%, 8.92%, 8.93%, and 4.46%. Your friend pays taxes at an appropriate rate. You recommend your friend considers net working capital (NWC) in the cash flow projections for this situation, knowing whatever is required each year will be recovered at the time she sells the ranch. Based on ranches with comparable risk, you have estimated and will use an appropriate cost of capital to analyze your friend's ranch. Question 1: How much are the year 1 operating cash flows (OCF)? Below are your numerical Inputs for the problem: Initial Cost ($) Year 1 Revenues (5) Year 1 Costs ($) Inflation Project Duration (years) Depreciation Method Tax Rate Net Working Capital (% oft:1 Revenues) Salvage Value (5) Cost of Capital 4 5 Please enter your numbers for the following into the 5 questions in Canvas: 6 How much are the year 1 operating cash flows (OCF)? 7 How much is the depreciation expense in year 2? 8 What is the change in Net Working Capital (NWC) in year 3? 9 What is the net cash flow from salvage (aka, the after-tax salvage value, or ATSV)? 0 What is the project's NPV? 1 Would you recommend purchasing the ranch? Briefly explain 3750000 1475000 500000 2.00% 5 MACRS 40.00% 12.00% 250000 11.00%

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

Financial Accounting

Authors: W. Steven Albrecht, James D. Stice, Earl Kay Stice, K. Fred Skousen, Albrecht S.E.

8th Edition

0324066708, 978-0324066708

More Books

Students also viewed these Accounting questions

Question

Name three healthy eating habits and three healthy exercise habits.

Answered: 1 week ago

Question

What is meant by planning or define planning?

Answered: 1 week ago

Question

Define span of management or define span of control ?

Answered: 1 week ago

Question

What is meant by formal organisation ?

Answered: 1 week ago

Question

What is meant by staff authority ?

Answered: 1 week ago