Question

# Assume University of Michigan is evaluating whether it should invest \$300,000,000 in this new innovation center...

Assume University of Michigan is evaluating whether it should invest \$300,000,000 in this new innovation center in Detroit. The project would increase cash flows from operations for 5 years.  The investment will have no salvage value.  U of M uses a 10% hurdle rate.  Other information is given below and numbers are in thousands.

 Year 1 Year 2 Year 3 Year 4 Year 5 Cash inflow from operations (pre-tax) \$   80,000 \$   90,000 \$ 110,000 \$ 120,000 \$ 130,000 Depreciation on tax return 70,000 70,000 80,000 40,000 40,000 Depreciation on financial statements 60,000 60,000 60,000 60,000 60,000 Net income from investment 20,000 30,000 50,000 60,000 70,000 PV Factor using 10%

Requirement 1:  Input the PV Factors in the above schedule using 10% for years 1-5.  These factors must be obtained from the present value tables in the text on page A-8. Use the 5 decimal places given in the table. (5 points).

Requirement 2:  Compute the annual net after-tax cash inflows.  We will use the alternative computations described on page 502 where we subtract the cash income tax payments from the cash inflows from operations. To start, we need to compute the annual cash income tax payments which are 21% of the cash inflow from operations less the tax return depreciation.  Year 1 is done for you.  Complete this schedule (5 points)

 Year 1 Year 2 Year 3 Year 4 Year 5 Cash inflow from operations (pre-tax) \$ 80,000 Depreciation on tax return (70,000) Taxable income 10,000 Tax rate 21% Cash payment for income taxes \$    2,100

Make sure to show dollar signs on the first and last number of each column. Format and align your numbers with commas and underlines on all schedules.

Now that we know the cash payment for income taxes, we can compute the after-tax cash flows.  Complete the schedule below (5 points)

 Year 1 Year 2 Year 3 Year 4 Year 5 Cash inflow from operations Cash payment for income taxes After-tax cash flows

https://detroit.curbed.com/detroit-development/2019/10/30/20939927/stephen-ross-dan-gilbert-michigan-innovation-center-detroit

https://detroitcenterforinnovation.com/

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