Question

Use the following information for the next four questions: The Umbrella Corporation is considering expanding one new type of virus, which will hopefully not result which will hopefully not result in another zombie outbreak. The project would quite a $21,000,000 capital investment and will be depreciated (straight-line to zet) od will be depreciated (straight-line to zero) over its 3 year life. Incremental sales are expected to be $15.750.000 annually for the 3 year period wit or the 3 year period with costs (excluding depreciation) of 30% of sales. The company would also have to commit initial 12.5% rate of return for projects of this risk level. 16) Project cash flow (Cash Flow From Assets) for Year O is: a) $16,000,000 b) -$16,000,000 c) -$17,000,000 d) -$23,500,000 e) -$24,500,000 17) Project cash flow (Cash Flow From Assets) for Year 1 is: a) $5,800,600 c) $7,800,231 d) $6,800,470 e) $9,817,500 18) Project cash flow (Cash Flow From Assets) for Year 3 is: a) $18,267,500 b) $10,826,250 c) $12,317,500 d) $13,800,000 e) $9,817,500

Answer 1

16) D) - 23,500,000

explanation- cost + working capital = 21,000,000 + 2,500,000

= (-)23,500,000

We use minus sign because it is cash outlay.

17) E) 9,817,500

Explanation - revenue 15,750,000

   (-) Cost (30% of sale) 4,725,000

EBITDA. 11,025,000

(-) Depreciation. 7,000,000

EBT. 4,025,000

(-) Tax. 1,207,500

Net income. 2,817,500

(+) Depreciation. 7,000,000

Cash flow. = 9,817,500

18) C) 12,317,500

explanation - cash flow + working capital

= 9,817,500 + 2,500,000

= 12,317,500

19) E) $1,634,678 ; yes

explanation : using financial calculator

Input : C0 = -23,500,000

C1 = 9,817,500. Frequency = 2

C2 = 12,317,500. Frequency =1

I = 12.5%

Npv = compute

We get, Npv = 1,634,678