MiniMe Ltd has spent $250,000 on research and development of a new product. The marketing department...

MiniMe Ltd has spent $250,000 on research and development of a new product. The marketing department estimates that the company can annually sell 200,000 units of the product at $100 each for 4 years. The product will incur $50 per unit in manufacturing costs and fixed costs are expected to be $7 million per year. MiniMe will need to buy manufacturing equipment costing $5 million. The equipment will be depreciated at a CCA rate of 20% and will have a salvage value of 20% of initial cost at the end of 4 years. MiniMe will also need to invest 5% of annual sales in net working capital up front. No additional net working capital investment is necessary after that. The company uses a discount rate of 14% and the tax rate is 38%. Using the above information, answer the following questions:

a) What is the dollar value of the initial investment in the project (at Time 0)?

b) What is the dollar value of the Year 1 operating cash flows (OCF), ignoring depreciation?

c) What is the total present value of the discounted operating cash flows for the 4 years of the project, ignoring depreciation?

d) Using the formula approach, what is the present value of the CCA tax shield that would arise from the purchase of the equipment?

e) What is the project’s net present value (NPV)?

Solutions

Expert Solution

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

jeff jeffy answered 1 year ago

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