Question

Aero Motorcycles is considering opening a new manufacturing facility in Fort Worth to meet demand for a new line of solar charged motorcycles​ (who wants to ride on a cloudy day​ anyway?) The proposed project has the following​ features; ​• The firm just spent​ $300,000 for marketing study to determine consumer demand​ (@ t=0). ​• Aero Motorcycles purchased the land the factory will be built on 5 years ago for​ $2,000,000 and owns it outright​ (that is, it does not have a​ mortgage).

The land has a current market value of​ $2,600,000. ​• The project has an initial cost of​ $26,780,583 (excluding​ land, hint: land is not subject to​ depreciation). ​​• If the project is​ undertaken, the company will realize an additional​ $8,000,000 in sales over each of the next ten years.​ (i.e. sales in each year are​ $8,000,000) ​• The company’s operating cost​ (not including​ depreciation) will equal​ 50% of sales. ​• The company’s tax rate is 35 percent. ​• Use a​ 10-year straight-line depreciation schedule. ​•

At t​ = 10, the project is expected to cease being economically viable and the factory​ (including land) will be sold for ​$4,500,000 (assume land has a book value equal to the original purchase​ price). ​• The project’s WACC​ = 10 percent ​• Assume the firm is profitable and able to use any tax credits​ (i.e. negative​ taxes) .0 What is the​ project's outflow at​ t=0? Answer to the nearest whole dollar value

Answer 1

Answer : Calculation of Projects Cash Outflow at t=0

Reason :

Cash Outflow = Market Value of Land + Initial Cost

= 2,600,000 + 26,780,583

= 29,380,583

Notes :

1.) The firm just spent​ $300,000 for marketing study to determine consumer demand​ (@ t=0) is irrelevant as it is sunk cost .

2.) Aero Motorcycles purchased the land the factory will be built on 5 years ago for​ $2,000,000 is irrelvent since the purchase price has already been paid.Now current market value of land is relevant.

answered by: anonymous