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

Business Finance Answers_Part_67 - CHAPTER 14 B-265 b To...

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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
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