Question

1. Consider a capital expenditure project that has forecasted revenues equal to $32,000 per year; cash expenses are estimated to be $29,000 per year. The cost of the project equipment is $23,000, and the equipment’s estimated salvage value at the end of the project is $9,000. The equipment’s $23,000 cost will be depreciated on a straight-line basis to $0 over a 10-year estimated economic life. Assume that the project requires an initial $7,000 working capital investment. The company’s marginal tax rate is 30%. Calculate the project’s net present value using a 12% discount rate.

Net initial investment = ??

Net cash flow for year 1 ~ 9 = ??

Net cash flow for year 10 = ??

Net present value for the project = ??

2. The earnings and dividends of Ned Computer Co. are expected to grow at an annual rate of 15 percent over the next 4 years and then slow to a constant growth rate of 8 percent per year. Ned currently pays a dividend of $1 per share. What is the value of Ned stock to an investor who requires a  12 percent rate of return?

1) Calculate dividend for year 1 ~ 4

2) Terminal value at the end of year 4

3) Current price is the sum of pv of dividend and terminal value.

Answer 1

1)

D87 Cash flows from Working Total cash 85 Year RevenueCostsDepreciation PBT income |Depreciation! operations | capital | Investment | flows |PVIF@1296| Present value 1.000 (30,000.00) 2,491.07 2,224.17 1,985.87 1,773.10 1,583.12 1,413.50 1,262.05 1,126.83 1,006.10 5,180.55 7,000 23,000 132,000 29,000 232,000 29,000 332,000 29,000 90 4 32,000 29,000 532,000 29,000 92 632,000 29,000 732,000 29,000 832,000 29,000 9 32,000 29,000 96 10 32,000 29,000 2,300 2,300 2,300 300 2,300 2,300 2,300 2,300 2,300 2,300 210 210 210 210 210 210 210 210 210 210 2,300 2,300 2,300 2,300 2,300 2,300 2,300 2,300 2,300 2,300 30,000 2,790 2,790 2,790 2,790 2,790 2,790 2,790 2,790 2,790 16,090 0.893 S 0.797 $ 0.712 $ 0.636 $ 0.567 $ 0.507 $ 0.452 $ 0.404 $ 0.361 S 0.322 $ 700 2,790 2,790 2,790 2,790 2,790 2,790 2,790 2,790 2,790 2,7907,000 89 700 490 490 94 700 700 6,300 9000"(1-30% (30,000) 2,790 16,090 Net present value$ (9,953.63) 98 Net initial investment 99 Net cash flow for year 1 9 100 Net cash flow for year 10 101 Net present value for the project$ (9,953.63)