Question

You are considering a 10-year project: | ||||||

An initial investment (today) in equipment of $900,000 is required. There will be no salvage value for this equipment after 10 years. | ||||||

The equipment is depreciated using the straight-line method, $90,000/year for 10 years. | ||||||

Annual expected revenues are $700,000/year for 10 years (beginning 1 year from today). Annual expected | ||||||

operating expenses are $250,000/year for 10 years (beginning 1 year from today). This $250,000 does not include depreciation. | ||||||

The tax rate is 35%. | ||||||

An investment (today) of $100,000 in inventory is required. This investment is fully recovered at the end of the 10 years. | ||||||

The cost of capital for this project is 13%. | ||||||

(i) What are the expected after-tax operating cash flows for the project? | ||||||

(ii) What is the net present value of the project? |

Answer #1

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