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chapter 10

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

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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

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