Question

Trademark Inc. is planning to set up a new manufacturing plant in New York to produce safety tools. The company bought some land six years ago for $4.3 million in anticipation of using it as a warehouse and distribution site, but the company has since decided to rent these facilities from a competitor instead. If the land were sold today, the company would sell for $4.6 million on an after-tax basis. In four years, the land could be sold for $4.8 million after taxes. The company hired a marketing firm to analyze the market at a cost of $250,000. Here is the summary of marketing report: We believe that the company will be able to sell 5,600, 6,300, 7,200, and 5,900 units each year for the next four years, respectively. We believe that $550 can be charged for each unit. We believe at the end of the four-year period, sales should be discontinued. The company believes that fixed costs for the project will be $615,000 per year. Variable costs are $462,000, $519,750, $594,000, 486,750 each year for the next four years, respectively. The equipment necessary for production will cost $2.5 million and will be depreciated according to a three-year MACRS schedule. At the end of the project, the equipment can be scrapped for $450,000. Net working capital of $325,000 will be required immediately. The company has a 21 percent tax rate, and the required return on the project is 9 percent.

Which of the following is true

$250,000 is an incremental cash flow and it will be part of the total project cash flow of year zero as an outflow.

$4,300,000 is an incremental cash flow since it is the original cost of land.

$4,800,000 is an opportunity cost and it will be part of the project cash flow of year zero as an outflow.

$4,600,000 is an opportunity cost and it will be part of the total project cash flow of year zero as an outflow.

$4,300,000 and $250,000 are sunk costs and they will be part of the total project cash flow of year zero as outflows.

What is the Year 2 depreciation expense

$833,250

$370,250

$185,250

$1,111,250

$370,379.63

What is the after-tax cash flow from the sale of the equipment?

$450,000

$185,250

$555,500

$355,500

$94,500

What is the capital spending cash flow of Year 0 and Year 4

Year 0:$2,500,000, outflow / Year 4:$4,800,000, inflow

Year 0:$7,100,000, outflow / Year 4:$5,155,500, inflow

Year 0:$7,100,000, outflow / Year 4:$5,250,000, inflow

Year 0:$6,800,000, outflow / Year 4:$5,155,500, inflow

Year 0:$2,500,000, outflow / Year 4:$355,500, inflow

What is the operating cash flow at Year 4?

$2,074,260.00

$1,732,070.00

$2,140,150

$2,251,042.50

$1,757,352.50

What is the project's NPV? Should you accept or reject the project?

(NO CHOICES)

Answer 1

1)

2)

3)

4)

5)

6)

NPV>0 Project is accepted