Question
Use the following for the next four questions: Fracking, Inc. is considering a replacement project. The required return is 10% and the tax rate is
Use the following for the next four questions:
Fracking, Inc. is considering a replacement project. The required return is 10% and the tax rate is 30%. If the firm purchases the new equipment, net working capital will have to be increased by $100,000 immediately.
| New Equipment |
| Old Equipment |
|
| Current book value | $400,000 |
Acquisition Cost | $800,000 | Current market value | $500,000 |
Life | 5 years | Remaining life | 5 years |
Annual sales | $400,000 | Annual sales | $400,000 |
Cash oper. Expenses | $150,000 | Cash Oper. Expenses | $260,000 |
Annual Depreciation | $160,000 | Annual Depreciation | $80,000 |
Acctg. Salvage Value | $0 | Acctg. Salvage Value | $0 |
Expected Salvage Val. | $200,000 | Expected Salvage Val. | $0 |
(Note: Be careful on the cash flow signs. Sales dont change. This is a cost-cutting project. A reduction in operating costs is exactly the same as an increase in sales, all else equal.)
#1 The net initial outlay for the proposed Fracking project would be closest to:
$430,000
$500,000
$530,000
$560,000
#2
The net change in after-tax operating cash flow for year 1 for the proposed Fracking project would be closest to:
$88,000
$93,000
$98,000
$101,000
#3
The terminal year after-tax TOTAL cash flow for the proposed Fracking project would be closest to:
$325,000
$341,000
$372,000
$394,000
#4 Based on the information provided, Fracking should:
Reject the project because the NPV is negative
Accept the project because the NPV is between $0 and $5,000
Accept the project because the NPV is between $5,001 and $15,000
Accept the project because the NPV is greater than $15,000
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