Question

In: Finance

Dow Chemical is considering a project that is expected to last 4 years with the following...

Dow Chemical is considering a project that is expected to last 4 years with the following details: Year 1 revenues of $560,000 increasing at 5% per year thereafter. Costs for year 1 are $200,000 and are expected to increase at 6% per year thereafter. The project will require new equipment valued at $400,000. This equipment will be depreciated to zero using the straight-line depreciation method over the 4-year life. Working capital at the firm will have to rise to $50,000 from the current level of $10,000 immediately, will fall down to $30,000 in year 2 and back to the original $10,000 level in year 4. The firm’s average tax rate is 24% and its marginal tax rate is 38%. Forecast all incremental CFs for this project and compute its NPV based on a discount rate of 12%.

Solutions

Expert Solution

Calculation of incremental cash flows of the project
Year 0 1 2 3 4
Investment in equipment -$400,000.00
Change net working capital -$40,000.00 $20,000.00 $20,000.00
Operating cash flow $261,200.00 $271,120.00 $281,461.60 $292,241.42
Incremental Cash flows of the project -$440,000.00 $261,200.00 $291,120.00 $281,461.60 $312,241.42
Calculation of NPV of project
Year Cash flow Discount factor @ 12% Present Values
0 -$440,000.00 1 -$440,000.00
1 $261,200.00 0.89285714 $233,214.29
2 $291,120.00 0.79719388 $232,079.08
3 $281,461.60 0.71178025 $200,338.81
4 $312,241.42 0.63551808 $198,435.06
NPV of the project $424,067.24
Working
Depreciation per year = Cost of an equipment / useful life of an asset = $400000 / 4 years = $1,00,000
Computation of operating cash flows of the project
Year 1 2 3 4
Revenue $560,000.00 $588,000.00 $617,400.00 $648,270.00
less : Costs $200,000.00 $212,000.00 $224,720.00 $238,203.20
less : Depreciation $100,000.00 $100,000.00 $100,000.00 $100,000.00
Profit before tax $260,000.00 $276,000.00 $292,680.00 $310,066.80
Less : Tax @ 38% $98,800.00 $104,880.00 $111,218.40 $117,825.38
Add : Depreciation $100,000.00 $100,000.00 $100,000.00 $100,000.00
Incremental Cash flow from Project $261,200.00 $271,120.00 $281,461.60 $292,241.42

jeff jeffy answered 1 year ago
Next > < Previous

Related Solutions

Dow Chemical Inc.is considering investing in a project that will cost $152,000 and have no salvage...
Dow Chemical Inc.is considering investing in a project that will cost $152,000 and have no salvage value at the end of its 5-year life. It is estimated that the project will generate annual cash inflows of $40,000 each year. The company has a hurdle or cutoff rate of return of 9%. Instructions Using the internal rate of return method calculate an approximate interest yield for the project. (use tables from Appendix G) Should this project be accepted by Dow Chemical...
Dow Chemical Inc.is considering investing in a project that will cost $152,000 and have no salvage...
Dow Chemical Inc.is considering investing in a project that will cost $152,000 and have no salvage value at the end of its 5-year life. It is estimated that the project will generate annual cash inflows of $40,000 each year. The company has a hurdle or cutoff rate of return of 9%. Instructions Using the internal rate of return method calculate an approximate interest yield for the project. (use tables from Appendix G) Should this project be accepted by Dow Chemical...
Company C is considering a new project that is expected to last for 5 years. Its...
Company C is considering a new project that is expected to last for 5 years. Its marketing group expects annual sales of $40 million for the first year, increasing by $10 million per year for the following four years. Manufacturing costs (i.e., COGS) and operating expenses (excluding depreciation) are expected to be 40% of sales and $7 million, respectively, from years 1-5. Developing the product will require upfront R&D and marketing expenses of $8 million total in period 0. The...
. You are considering the following project. What is the expected cash flow for the last...
. You are considering the following project. What is the expected cash flow for the last year (year 3)? This cash flow includes operating cash flow and terminal cash flow. Project life: 3 years Equipment: Cost: $20,000 Economic life: 3 years Salvage value: $4,000 Initial investment in net working capital: $2,000 Revenue: $13,000 in year 1, with a nominal growth rate of 6% per year Fixed cost: $3,000 in year 1 Variable cost: 30% of revenue Corporate tax rate (T):...
A firm is considering two projects, A and B. Each project will last for 4 years....
A firm is considering two projects, A and B. Each project will last for 4 years. The projects are INDEPENDENT. The projected cash flows for each project are shown below: Year 0 1 2 3 4 Project A -20.00 8.00 8.00 6.00 4.00 Project B -30.00 10.00 10.00 11.00 9.00 The cost of capital for the firm is 10.00%. What is the NPV for project A at the cost of capital? Answer Format: Currency: Round to: 2 decimal places.
1. A company has three new project ideas that are all expected to last 4 years....
1. A company has three new project ideas that are all expected to last 4 years. Unfortunately due to a resource constraint they can only pursue 2 of these projects. Assume the development costs for all projects are paid up front (i.e. prior to the start of the project). The specific financial projections for the three projects are: ·         Project 1 – Development cost would be $50,000. Projected revenues from the project are $50,000 in the first year with an...
Question: You are starting a new project. This project would last 4 years. The following is...
Question: You are starting a new project. This project would last 4 years. The following is the input information that you have collected: Building cost (1.3% in the first year and then 2.6% every year) $12,000,000 Equipment cost (MACRS 5 years) $8,000,000 Net operating working capital requirement (% of Sales) 10% First year sales (in units) 20,000 Growth rate in units sold 0% Sales price per unit $3,000 Variable cost per unit $2,100 Fixed costs $8,000,000 Market value of building...
What is the EAC of two projects: project A, which costs $150 and is expected to last two years, and project B, which costs $190 and is expected to last three years?
  Q2. What is the EAC of two projects: project A, which costs $150 and is expected to last two years, and project B, which costs $190 and is expected to last three years? The cost of capital is 12%. (1 mark) Answer: Q3. A company pays annual dividends of $10.40 with no possibility of it changing in the next several years. If the firm’s stock is currently selling at $80, what is the required rate of return? (1 mark)...
GnuYak Industries is considering a new project that will last for three years. This project requires...
GnuYak Industries is considering a new project that will last for three years. This project requires an initial investment in a machine that costs £90,000 immediately (year 0) and will be depreciated in straight line over its three-year life to a residual value of 0. The management expects this project will result in sales of £100,000 and cost of goods sold will be 50% of sales each year. This project also requires a total net working capital of £10,000 in...
A project has an initial cost of $1,000,000 and is expected to last for 2 years....
A project has an initial cost of $1,000,000 and is expected to last for 2 years. In year 1, depreciation charge will be $100,000 and earnings are expected to be $164,747. In year 2, depreciation will be $100,000 and earnings are expected to be $208,905. Assume the required return is 8%. What is the value of this project?
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT