Where do you add the $200,000 on the analysis? What calculations need to be made to determine if Bayside should sell? Would they have accepted the project if they knew about the additional $200,000?
emd option control NPV and Project Reevaluation with Taxes, Straight-Line Depreciation posal for a new manufacturing facility: 2015, the Bayside Chemical Company prepared the following analysis of an investment pro Chapter 24 Capital Budgeting Decisions 1099 7-inch LO2, 5, 6 sting Predicted Cash Inflows Year(s) 12% (outflows of Cash Present (A) Flows Value Present Value of Hal investment (B) Factor (C) Cash Flows Fixed assets . . ... . . . .. (A) X (C) Working capital . . ... $(810,000) (100,000) 1.00000 operations OC 1.00000 $ (810,000) eter- Annual taxable income without depreciation . ........ .. . . . . . . . (100,000) ger Taxes on income ($310,000 X 0.40) . .... . 310,000 ons Depreciation tax shield . . . . . . (124,000 1-5 3.60478 1,117,482 . . . 64,800 1- 5 asinvestment 1 - 5 3.60478 3.60478 (446,993) to site restoration . . . . . . . . . . . . . . . . . . . . . ... 233,590 80,000 0.56743 (45,394) a Tax shield of restoration ($80,000 x 0.40) . .... 32,000 Working capital . . . 100,000 0.56743 18, 158 m- let present value of all cash flows. ....... . .. . . 0.56743 56,743 $ 23,586 amputation of depreciation tax shield: Amual straight-line depreciation ($810,000 = 5) . ... . . . . $162,000 arrate ..... X 0.40 Depreciation tax shield . . . . .. . . ...... $ 64,800 Because the proposal had a positive net present value when discounted at Bayside's cost of capital of 12 percent, the project was approved; all investments were made at the end of 2016. Shortly after production began in January 2017, a government agency notified Bayside of required additional expenditures totaling $200,000 to bring the plant into compliance with new federal emission regulations. Bayside has the option either to comply with the regulations by Decem- ber 31, 2017, or to sell the entire operation (fixed assets and working capital) for $250,000 on December 31, 2017. The improvements will be depreciated over the remaining four-year life of the plant using straight-line depreciation. The cost of site restoration will not be affected by the improvements. If Bayside elects to sell the plant, any book loss can be treated as an offset against taxable income on other operations. This tax reduction is an additional cash benefit of selling. a. Should Bayside sell the plant or comply with the new federal regulations? To simplify calcula- REQUIRED tions, assume that any additional improvements are paid for on December 31, 2017. b. Would Bayside have accepted the proposal in 2016 if it had been aware of the forthcoming C. Do you have any suggestions that might increase the project's net present value? (No calcula- federal regulations L01, 2, 5 tions are required.) 441. Post-Audit and Reevaluation of Investment Proposal: NPV Anthony Company's capital budgeting committee is evaluating a capital expenditure proposal for the production of a high definition television receiver to be sold as an add-on feature for personal computers. The proposal calls for an independent contractor to construct the necessary facilities 31. 2017. at a total cost of $250,000. Payment for all construction costs will be made in cash will also be made available on December 31, 2017, for et life; there is a high probability by Decer ctivities the proposal
