Question
The following expenses and revenues have been estimated for a new project: Revenues from sales = $4.1 10 6 /yr Cost of manufacturing (excluding depreciation)
The following expenses and revenues have been estimated for a new project:
Revenues from sales = $4.1 106 /yr
Cost of manufacturing (excluding depreciation) = $1.9 106 /yr
Taxation rate = 40%
Fixed Capital Investment = $7.7 106 (two payments of $5 106 and $2.7 106 at the end of years 1 and 2, respectively)
Start-up at the end of year 2
Working capital = $2 106 at the end of year 2
Land cost = $0.8 106 at the beginning of the project (time = 0)
Project life (for economic evaluation) = 10 yr after start-up
For this project, estimate the NPV of the project assuming an after-tax internal hurdle rate of 11% p.a., using the following depreciation schedules.
a. MACRS method for 5 years
b. Straight-line depreciation with an equipment life (for depreciation) of 9.5 years
Comment on the effect of discounting on the overall profitability of large capital projects.
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