chapter 10

chapter 10 - Yr 07 Use the following information to answer...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Yr 07 Use the following information to answer the next three questions. Maple Media is considering a proposal for a new project. In reviewing the proposal, the company’s CFO is considering the following facts: The new business will require the company to purchase additional fixed assets that will cost $20,000,000 at t=0. For tax and accounting purposes, these costs will be depreciated on a straight line basis to a value of $5,000,000 over the 5 year life of the project. At the end of five years, the company will get out of the business and will sell the fixed assets for $3,000,000. The company spent $2,000,000 to conduct the research and development on this project. Because the R&D results were positive, the firm decided to go ahead with the project. The project will require a $8,000,000 increase in net working capital at t=0, which will be recovered in the last (terminal) year of the project. If the firm does not enter this business, then it will lease its facility for $500,000 per year (before taxes), starting in year 1. This expense will not be impacted by inflation. The firm will have a yearly interest expense of $1,000,000, starting in year 1. The tax rate is 40% The new business is expected to generate $30 million in sales each year starting in year 1, for 5 years. The operating costs, excluding depreciation are expected to be $25 million per year, starting in year 1. Inflation is expected to be 3% a year, and revenues and costs are expected to increase at the inflation rate starting in the year 2 cash flows. (Do not put inflation into the year 1 cash flows.) Chapter 10 18. What are the initial cash flows for this project? a. -$20,000,000 b. -$22,000,000 c. -$28,000,000 d. -$30,000,000 e. -$18,000,000 Chapter 10 19. What are the year 1 cash flows for the project? a.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 6

chapter 10 - Yr 07 Use the following information to answer...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online