CSC is evaluating a new project to produce encapsulators. The initial investment in plant | ||||
and equipment is $500,000. Sales of encapsulators in year 1 are forecasted at $200,000 and | ||||
costs at $100,000. Both are expected to increase by 10% a year in line with inflation. Profits | ||||
are taxed at 35%. Working capital in each year consists of inventories of raw materials and | ||||
is forecasted at 20% of sales in the following year. | ||||
The project will last five years and the equipment at the end of this period will have no | ||||
further value. For tax purposes the equipment can be depreciated straight-line over these | ||||
five years. If the nominal discount rate is 15%, show that the net present value of the project | ||||
is the same whether calculated using real cash flows or nominal flows. |
Figures in $ | ||
Initial Investment | ||
Sales in Year 1 | ||
Costs in Year 1 | ||
Inflation | ||
Working Capital (% of sales-following yr) | ||
Life of the Project | ||
Taxes | ||
Nominal discount rate | ||
Real Discount rate | ||
Salvage Value of Plant & Equipment |
CSC is evaluating a new project to produce encapsulators. The initial investment in plant and equipment...
Chapter 6-Making Investment Decisions Problems 1 CSC is evaluating a new project to produce encapsulators. The project will last five years and the company uses straight-line depreciation method. The initial investment in plant and equipment is $800,000. Sales of encapsulators are forecasted at $200,000 per year. If the tax rate is 20% and the cost of capital is 15%, should CSC take this project?
The initial investment in Plant and Equipment will be $175,000. The equipment will be depreciated on a straight-line basis over 5 years with no expected salvage value. The project will also require an initial investment in net working capital of $30,000 which the company will recover at the end of the 5 year period. Sales are forecast to be $220,000 each year, with cash operating expenses of $90,000. The company tax rate is 30%, and their weighted average cost of...
Electricar Inc. is considering expanding manufacturing capacities in Asia. This would involve an initial investment of 4 billion RMB . The plant will start production after one year. It is expected to last for five years and a have a salvage value and the end of this period of 500 million RMB in real terms. The plant will produce 100 000 cars a year. The firm anticipates that in the first year it will be able to sell each car...
The initial investment for this project will be $2.4 million. This amount is for depreciable equipment, which will be depreciated over 4 years using the straight-line method to zero book value. A working capital investment of $300,000 will also be made at the beginning of the project (Time T=0). The entire working capital investment will be recovered at the end of the project. Initial marketing studies suggest that Earnings before Depreciation and Taxes for 6 years will be as shown...
Project NPV United Pigpen is considering a proposal to manufacture high-protein hog feed. The project would make use of an existing warehouse, which is currently rented out to a neighboring firm. The next year’s rental charge on the warehouse is $100,000, and thereafter the rent is expected to grow in line with inflation at 4% a year. In addition to using the warehouse, the proposal envisages an investment in plant and equipment of $1.2 million. This could be depreciated for...
Question 3 (14 marks) A project has an initial investment of $300,000 for fixed equipment. The fixed equipment will be depreciated on a straight-line basis to zero book value over the three-year life of the project and have zero salvage value. The project also requires $38,000 initially for net working capital. All net working capital will be recovered at the end of the project. Sales from the project are expected to be $300,000 per year and operating costs amount to...
Greer Law Associates is evaluating a capital investment proposal for new office equipment for the current year. The initial investment would require the firm to spend $50,000. The equipment would be depreciated on a straight-line basis over five years with no salvage value. The firm's accountant has estimated the before-tax annual cash inflow from the investment to be $15,000. The income tax rate is 40 percent, and all taxes are paid in the year that the related cash flows occur....
Hewlett Packard is considering an investment project that requires an initial investment of $20 million. The investment will generate $10 million at the end of each year for 3 years if there is no inflation. A financial analyst determines that the project will have a nominal discount rate of 17.35%. The analyst also forecasts an inflation rate of 7% (A) What is the Real Rate ____________9.67%_____________ (The answer is 9.67, I just could not figure out Part B) (B) What...
United Pigpen is considering a proposal to manufacture high-protein hog feed. The project would make use of an existing warehouse, which is currently rented out to a neighboring firm. The next year’s rental charge on the warehouse is $180,000, and thereafter, the rent is expected to grow in line with inflation at 4% a year. In addition to using the warehouse, the proposal envisages an investment in plant and equipment of $1.68 million. This could be depreciated for tax purposes...
United Pigpen is considering a proposal to manufacture high-protein hog feed. The project would require use of an existing warehouse, which is currently rented out to a neighboring firm. The next year’s rental charge on the warehouse is $120,000, and thereafter, the rent is expected to grow in line with inflation at 4% a year. In addition to using the warehouse, the proposal envisages an investment in plant and equipment of $1.32 million. This could be depreciated for tax purposes...