Business Finance Answers_Part_67 - CHAPTER 14 B-265 b To find the required return on this project we first need to calculate the WACC for the company

This preview shows page 1 - 2 out of 2 pages.

CHAPTER 14 B-265 b. To find the required return on this project, we first need to calculate the WACC for the company. The company’s WACC is: WACC = [(\$639/\$897)(.1460) + (\$32.4/\$897)(.0679) + (\$225.6/\$897)(.0527)] = .1197 The company wants to use the subjective approach to this project because it is located overseas. The adjustment factor is 2 percent, so the required return on this project is: Project required return = .1197 + .02 = .1397 c. The annual depreciation for the equipment will be: \$35,000,000/8 = \$4,375,000 So, the book value of the equipment at the end of five years will be: BV 5 = \$35,000,000 – 5(\$4,375,000) = \$13,125,000 So, the aftertax salvage value will be: Aftertax salvage value = \$6,000,000 + .35(\$13,125,000 – 6,000,000) = \$8,493,750 d. Using the tax shield approach, the OCF for this project is: OCF = [(P – v)Q – FC](1 – t) + t C D OCF = [(\$10,900 – 9,400)(18,000) – 7,000,000](1 – .35) + .35(\$35,000,000/8) = \$14,531,250 e. The accounting breakeven sales figure for this project is: Q A = (FC + D)/(P – v) = (\$7,000,000 + 4,375,000)/(\$10,900 – 9,400) = 7,583 units  #### You've reached the end of your free preview.

• • • 