Practice_Question_for_Final_solution

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Practice Question for Final Suppose Alcoa is considering an investment that would extend the life of one of its aluminum mines for four years. The project would require upfront costs (operating expenses at year 0) of $6.67 million plus a $24 million investment in equipment. The equipment will be obsolete in four years and will be depreciated via straight line method over that period. During the next four years, Alcoa expects annual sales of $60 million per year from this mine. Mining costs and operating expenses are expected to total $25 million and $9 million, respectively, per year in the following four years. Finally Alcoa expects no net working capital requirements for the project, and it pays a corporate tax of 35%. a. What are the incremental earnings if Alcoa chooses to take the project? b. What are the incremental cash flows if Alcoa chooses to take the project? Depreciation=24/4=$6 million. Answer: c. To decide whether to take the project or not, Alcoa still need the information for cost of capital. Suppose currently there are two types of financing: long
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