Question

A proposed project will provide the capability to produce a specialized product estimated to have a short market?(sales) life. Based on an? after-tax analysis using the PW? method, what minimum amount of equivalent uniform annual revenue is required to justify the project? economically?

The minimum amount of equivalent uniform annual revenue that is required to justify the project economically is

?$__________thousand.{C}{C}{C}{C}

*Capital investment is ?$1,040,000.

?• The cost of depreciable? property, which is part of the $1,040,000 total estimated project? cost, is

?$460,000

•?Assume, for? simplicity, that the depreciable property is in the MACRS? (GDS) three-year property class.

•The analysis period is three years.

•Annual operating and maintenance expenses are $611,000 in the first? year, and they increase at the rate of 5%

per year? (i.e.,f equals=5?%) thereafter.

•Estimated MV of depreciable property from the project at the end of three years is $340,000.

•Federal income tax rate=35?%; state income tax rate=3?%.

•MARR? (after taxes) is 12% per year.

Use the? half-year time convention for depreciation in the last year.

Please help, ive tried a few times and keep getting the wrong answer

If you could include the excel chart with the formulas that would be awesome. THanks

Answer 1

The minimum amount of equivalent uniform annual revenue that is required to justify the project economically is USD 1151.085 thousands.The minimum value is derived on the basis of assuming the initial total capital investment to be equal to the sum of present value of operating cashflows at the breakeven annual revenue price.

Any price above USD 1151.085 thousands will be beneficial for the company to invest in the project.

The calculations are shown in the table below:-

			(USD thousands)
Particulars	Year 1	Year 2	Year 3
Total Income
Total Sales --> (1)	1151.09	1151.09	1151.09
Other income (Sale of depreciable property at the end of 3 years) --> (2)	0.00	0.00	0.00
Total Costs
Total operating & maintenance expenses --> (3) (Yearly increase at the rate of 5%)	611.00	641.55	673.63
Assuming 3 year MACR - GDS property class 200% declining method and half-year time convention for depreciation in the last year,
Total capital investment --> (4)	1040
Yearly depreciation rate (3 -year class taken from IRS website) --> (5)	33.33%	44.44%	7.41%
Yearly depreciation expense --> (6= 4 X 5)	346.67	462.22	77.04
Interest Paid on debt outstanding --> (7)	0.00	0.00	0.00
Total expenses --> (8 = 3+6+7)	957.67	1,103.77	750.66
Profit before tax --> (9 = 1+2-8)	193.42	47.31	400.42
Federal income tax rate --> (10)	35%	35%	35%
State income tax rate --> (11)	3%	3%	3%
Tax paid --> (12 = 9 X (10+11))	73.50	17.98	152.16
Profit after tax --> (13 = 9 - 12)	119.92	29.33	248.26
For NPV calculations, we need to calculate Operating Cashflow (OCF) for each year
OCF --> (14 = 1+2-3-12)	466.59	491.56	325.30
MARR (Discount rate )--> (15)	12%	12%	12%
Discount factor --> (16/(1+15)^(No. of yrs))	0.89	0.80	0.71
PV of OCF cashflows --> (17= 14 X 16)	416.59	391.87	231.54
Sum of PV of OCF cashflows --> (18)	1,040.00
Initial cost --> (19= -4)	(1,040.00)
Total NPV of the project --> (20 = 18+19)	0.00