Question

Aero Motorcycles is considering opening a new manufacturing facility in Fort Worth to meet demand for a new line of solar charged motorcycles (who wants to ride on a cloudy day anyway?) The proposed project has the following features: • The firm just spent $300,000 for marketing study to determine consumer demand (@t=0). • Aero Motorcycles purchased the land the factory will be built on 5 years ago for $2,000,000 and owns it outright (that is, it does not have a mortgage). The land has a current market value of $2,600,000. • The project has an initial cost of $27,655,530 (excluding land, hint: land is not subject to depreciation). • If the project is undertaken, the company will realize an additional $8,000,000 in sales over each of the next ten years. (.e. sales in each year are $8,000,000) • The company's operating cost (not including depreciation) will equal 50% of sales • The company's tax rate is 35 percent. • Use a 10-year straight-line depreciation schedule. • Att =10, the project is expected to cease being economically viable and the factory (including land) will be sold for $4,500,000 (assume land has a book value equal to the original purchase price). . The project's WACC = 10 percent • Assume the firm is profitable and able to use any tax credits (.e. negative taxes). What is the project's outflow at t=0? Answer to the nearest whole dollar value tes

Answer 1

Given,

Cost of land and building has already been incurred 5 years ago and hence is not part of outflow at t=0

The following are spent in year t=0 and hence part of outflow at t=0:

1.   Cost of marketing study $300,000

2. Initial cost $27,655,530

Revenues and all other costs, expenses and tax are to be received or paid in years 1 through 10 and hence are not part of outflow t=0.

Therefore, outflow at t=0 is $300,000 + $27,655,530 = $27,955,530.