Question
In: Finance
A firm is considering a project that requires an initial investment of $55,000. The project is...
A firm is considering a project that requires an initial investment of $55,000. The project is expected to generate revenues of $80,000 per year for three years. Operating expenses will be 65% of revenues. The equipment will be depreciated on a straight-line basis to a zero net salvage value. The equipment will have a life of 3 years. The project feasibility study, which was just completed, cost $35,000. The project requires an initial investment in working capital of $5,000. Further investments in working capital will be needed as follows: an additional $3,000 at t=1 and $2,500 at t=2. It is assumed that all of the investments in working capital made over t=0,1,2 will be completely recovered at the end of the project. The corporate tax rate is 30%. At t=3, the market value of the equipment is expected to be $20,000, but the company does not plan to sell it. If the cost of capital is 10%, should the investment be undertaken?
Solutions
Expert Solution
As NPV of the project is positive , the project/investment shall be undertaken
Calculations
jeff jeffy answered 5 months agoRelated Solutions
A firm is considering a project that requires an initial investment of $420,000. The life of...
A firm is considering a project that requires an initial
investment of $420,000. The life of this project is five years.
Cash flows for each year are estimated as follows: Year 1 Year 2
Year 3 Year 4 Year 5 $180,000 $220,000 $160,000 -$20,000 -$80,000
If the cost of capital of this project is 8%, what is the payback
period of this project?
A firm is considering a project that requires an initial investment of $250,000. The life of...
A firm is considering a project that requires an initial
investment of $250,000. The life of this project is five years.
Cash flows for each year are estimated as follows:
Year 1
Year 2
Year 3
Year 4
Year 5
$80,000
$120,000
$160,000
$40,000
-$90,000
The cost of capital of this project is 8%. Calculate the
profitability index and make a decision.
A firm is considering a project that requires an initial investment of $180,000. The life of...
A firm is considering a project that requires an initial
investment of $180,000. The life of this project is five years.
Cash flows for each year are estimated as follows:
Year 1
Year 2
Year 3
Year 4
Year 5
$105,000
$190,000
$50,000
-$60,000
-$110,000
The cost of capital of this project is 8%. Calculate the
internal rate of return of the project and make a decision.
Accept since the IRR is 5.04%, which is less than the required
rate....
Turnbull Co. is considering a project that requires an initial investment of $270,000. The firm will...
Turnbull Co. is considering a project that requires an initial
investment of $270,000. The firm will raise the $270,000 in capital
by issuing $100,000 of debt at a before-tax cost of 8.7%, $30,000
of preferred stock at a cost of 9.9%, and $140,000 of equity at a
cost of 13.2%. The firm faces a tax rate of 40%. What will be the
WACC for this project?
9.88%
11.36%
10.87%
6.42%
Consider the case of Kuhn Co.
Kuhn Co. is considering...
A firm is considering a project that requires an initial investment of $300,000 in new equipment,...
A firm is considering a project that requires an initial
investment of $300,000 in new equipment, which has a five-year life
and a CCA rate of 30 percent. An initial investment in raw
materials inventory of $50,000 is also required to support the
project, which will rise to 15 percent of sales. The project will
generate sales revenue of $400,000 in the first year, which will
grow at 4 percent per year. Variable costs will be $220,000 for the
first...
considering a project that requires an initial investment of $270,000. The firm will raise the $270,000...
considering a project that requires an initial investment of
$270,000. The firm will raise the $270,000 in capital by issuing
$100,000 of debt at a before-tax cost of 9.6%, $30,000 of preferred
stock at a cost of 10.7%, and $140,000 of equity at a cost of
13.5%. The firm faces a tax rate of 25%, what will be the WACC for
this project?\
a. 11.97% b.
13.73% c.
9.04% d. 10.86%
18 A firm is considering an investment project which requires the initial outlay of $10 million....
18 A firm is considering an investment project which requires
the initial outlay of $10 million. The 12-year project is expected
to generate annual net cash flows each year of $1 million and have
the expected terminal value at the end of the project of $5
million. The cost of capital is 6 percent, and its marginal tax
rate is 40 percent. Calculate the profitability index of this
project.
0.84
0.09
1.70
1.34
1.09
Company XYZ is considering project A. Project A requires an initial investment of $75,000.
Company XYZ is considering project A. Project A requires an initial investment of $75,000. It generates $35,000 each year for the coming 3 years. What is the discounted payback period for this project if the proper discount rate is 18%?
A company is considering a project that requires an initial investment of $660,000 and has a...
A company is considering a project that requires an initial
investment of $660,000 and has a useful life of 11 years. Expected
cash receipts from the project will be $175,000 each year. The
salvage value of the assets used in the project will be $75,000.
The company’s tax rate is 30%. For tax purposes, the entire initial
investment (without any reduction for salvage value) will be
depreciated over 11 years. The company uses a discount rate of
21%.
Provide the...
A company is considering a project that requires an initial investment of $660,000 and has a...
A company is considering a project that requires an initial
investment of $660,000 and has a useful life of 11 years. Expected
cash receipts from the project will be $195,000 each year. The
salvage value of the assets used in the project will be $70,000.
The company’s tax rate is 25%. For tax purposes, the entire initial
investment (without any reduction for salvage value) will be
depreciated over 11 years. The company uses a discount rate of
20%.
Provide the...
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