Question

There are four (4) consecutive problems that use the information below. The Lee & Pearson Company is considering an expansion of its production facilities which will permit the firm to build and sell a new line of cell phones. The project requires a $10,000,000 capital investment and is expected to have a three-year economic life. Other relevant information is: At the end of the project, the equipment can be sold for $300,000. The firm’s WACC is estimated at 8%. Incremental sales are projected to be $12,000,000 per year Annual costs (excluding depreciation) are estimated to be $3,000,000. The project requires a $2,000,000 initial investment in net operating working capital. The expected tax rate is 33%. The MACRS depreciation schedule in the list below will be used. YEAR 1 = 0.4445 YEAR 2 = 0.3333 YEAR 3 = 0.1481 YEAR 4 = 0.0741 Project cash flow for year 3 is closest to: $8,518,730 $8,818,730 $8,964,260 $9,000,000

Answer 1