Question

Use the following data to answer Questions 1 through 14:

Manigault Industries is considering an expansion project. The proposed project would have a 4-year life along with the following features:

• The necessary equipment is priced at $90,000.
• The engineers require a cost of $3,000 to install the equipment and $5,000 to train employees to use the equipment
• The equipment will be depreciated using MACRS 3 year class over 4 years using the following depreciation rates: 33% (year 1), 45% (year 2), 15% (year 3) and 7% (year 4).
• If the project is undertaken, at t = 0 the company will need to increase its inventories by $50,000 and its accounts payable by $30,000.
• The company will realize an additional $500,000 in sales over each of the next four years.
• The company’s operating costs (excluding depreciation) will equal $200,000 a year.
• The company’s tax rate is 40%.
• At t = 4, the equipment will be sold for $30,000.
• The weighted average cost of capital “WACC” is 10%.

1. The net working capital (NWC) equals: *

A. $50,000

B. $30,000

C. $80,000

D. $20,000

E. None of the above

2. The base price of the equipment equals: *

A. $93,000

B. $98,000

C. $200,000

D. $500,000

E. None of the above

3. What is the net cost of the equipment for capital budgeting purposes? *

A. $113,000

B. $45,200

C. $30,000

D. $118,000

E. None of the above

4. The depreciation expense for the 1st year is: *

A. $30,000

B. $30,690

C. $32,340

D. $0

E. None of the above

5. The depreciation expense for the 2nd year is: *

A. $25,000

B. $50,850

C. $41,850

D. $44,100

E. None of the above

6. The depreciation expense for the 3rd year is: *

A. $28,250

B. $20,750

C. $13,950

D. $14,700

E. None of the above

7. The depreciation expense for the 4th year is: *

A. $6,510

B. $6,860

C. $2,100

D. $5,000

E. None of the above

8. The after-tax Cash Flow for the 1st year is: *

A. $500,000

B. $200,000

C. $192,936

D. $192,276

E. None of the above

9. The after-tax Cash Flow for the 2nd year is: *

A. $196,740

B. $153,540

C. $200,000

D. $30,000

E. None of the above

10. The after-tax Cash Flow for the 3rd year is: *

A. $286,000

B. $20,000

C. $185,580

D. $185,880

E. None of the above

11. The after-tax Cash Flow for the 4th year is: *

A. $182,604

B. $182,744

C. $176,094

D. $117,396

E. None of the above

12. The Book Value of the equipment at termination is: *

A. $30,050

B. $10,500

C. $6,510

D. $0

E. None of the above

13. The Terminal Value (TV) is: *

A. $38,000

B. $61,050

C. $45,485

D. $35,636

E. None of the above

14. The NPV value of the project is: *

A. $514,496

B. $272,500

C. - $296,235

D. -$300,250

E. None of the above

Answer 1

	ANSWERS:
1]	[D]	$              20,000
2]	[A]	$              93,000
3]	[A] The question should be net cost of the project for capital budgeting.	$ 113,000
4]	[B]	$              30,690
5]	[C]	$              41,850
6]	[C]	$              13,950
7]	[A]	$                6,510
8]	[D]	$ 192,276
9]	[A]	$ 196,740
10]	[C]	$ 185,580
11]	[A]	$ 182,604
12]	[D]	$                       -
13]	[A]	$              38,000
14]	[A]	$ 514,496
	WORKINGS:
		0	1	2	3	4
	Sales		$       500,000	$       500,000	$         500,000	$           500,000
	Operating costs other than depreciation		$       200,000	$       200,000	$         200,000	$           200,000
	Depreciation [MACRS]		$         30,690	$          41,850	$           13,950	$ 6,510	$        93,000
	NOI		$       269,310	$       258,150	$         286,050	$           293,490
	Tax at 40%		$       107,724	$       103,260	$         114,420	$           117,396
	NOPAT		$       161,586	$       154,890	$         171,630	$           176,094
	Add: Depreciation		$         30,690	$ 41,850	$           13,950	$ 6,510
	OCF		$       192,276	$       196,740	$         185,580	$           182,604
	Capital expenditure	$              93,000
	Change in NWC [50000-30000]	$              20,000	$                   -	$                   -	$                     -	$           (20,000)
	After tax sale value of eqipment = 30000*(1-40%) =					$ 18,000
	After tax cash flows	$         (113,000)	$       192,276	$       196,740	$ 185,580	$           220,604
	PVIF at 10%	1	0.90909	0.82645	0.75131	0.68301
	PV at 10%	$         (113,000)	$       174,796	$       162,595	$         139,429	$           150,676
	NPV	$           514,496