Question

question 1 ans 2

Question 1 (10 points) A firm plans to build a plant on land it owns. The firm paid $200,000 for the land 30 years ago. Its current market value is $2,000,000. Construction costs, including machinery, will require an initial outlay of $20,000,000. The project will create sales of $12,000,000 per year for years 1 10. No change in other operating costs is expected. The firm uses straight line depreciation over the 10 year life of the project. Salvage value is $1,000,000. The tax rate is 40%. 23. The initial investment is $_.._. $24,000,000 $24,200,000 $23,000,000 $22,000,000 $22,200,000 Question 2 (10 points) A firm plans to build a plant on land it owns. The firm paid $200,000 for the land 30 years ago. Its current market value is $2,000,000. Construction costs, including machinery, will require an initial outlay of $20,000,000. The project will create sales of $12,000,000 per year for years 1 10. No change in other operating costs is expected. The firm uses straight line depreciation over the 10 year life of the project. Salvage value is $1,000,000. The tax rate is 40%. The incremental operating cash flow in year 5 is $ $7,960,000 $7,200,000 $8,000,000 9,240,000 $8,400,000

Answer 1

Time line		0	1
Land cost		2000000
Cost of new machine		20000000
=Q1. Initial Investment outlay		22000000
Sales			12000000
Profits	Sales-variable cost		12000000
-Depreciation	Cost of equipment/no. of years		-2000000
=Pretax cash flows			10000000
-taxes	=(Pretax cash flows)*(1-tax)		6000000
+Depreciation			2000000
=Q2. after tax operating cash flow			8000000