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Kean University College of Business and Public Administration and Corporate Finance II. Problem 1 Burress Beverages is considering a project where they would open a new facility in Seattle, Washington. The company’s CFO has assembled the following information regarding the proposed project: It would cost $500,000 today (at t = 0) to construct the new facility. The cost of the facility will be depreciated using the following depreciation schedule: MACRS Depreciation Year Rates 1 0.33 2 0.45 3 0.15 4 0.07 If the company opens the facility, it will need to increase its inventory by $100,000 at t = 0. $70,000 of this inventory will be financed with accounts payable. The CFO has estimated that the project will generate the following amount of revenue over the next three years: Year 1 Revenue = $1.0 million Year 2 Revenue = $1.2 million Year 3 Revenue = $1.5 million Operating costs excluding depreciation equal 70% of revenue. The company plans to abandon the facility after three years. At t = 3, the project’s estimated salvage value will be $200,000. At t = 3, the company will also recover the net operating working capital investment that it made at t = 0.
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