Answer 1 points 1 points 1 points 1 points a. The company will produce the new p
ID: 2665556 • Letter: A
Question
Answer
a. The company will produce the new product in a vacant building that was used to produce another product until last year. The building could be sold, leased to another company, or used in the future to produce another of the firm's products. b. The project will utilize some equipment the company currently owns but is not now using. A used equipment dealer has offered to buy the equipment. c. The company has spent and expensed for tax purposes $3 million on research related to the new detergent. These funds cannot be recovered, but the research may benefit other projects that might be proposed in the future. d. The new product will cut into sales of some of the firm’s other products. e. If the project is accepted, the company must invest $2 million in working capital. However, all of these funds will be recovered at the end of the project’s life.Explanation / Answer
Q#16 (c)
Q#17 (d)
Q#18 (a)
Sales revenues $12,700
Depreciation ($4,000)
Other operating costs ($6,000)
Net Income Before Tax $2,700
Less: Tax (35%) ($945)
Net Income After Tax $1,755
Estimated Year 1 CF = Net Income After Tax+Depreciation = $5,755
Q#19 (c)
Equipment cost $70,000
Depreciation rate, Year 4 7.0%
Sales revenues $41,000
OC (excl. deprec.) $25,000
Depreciation 4,900
Operating income (EBIT) $11,100
Taxes Rate = 35% 3,885
After-tax EBIT $ 7,215
+ Depreciation 4,900
Cash flow, Year 4 $12,115
Q#20 (b)
WACC 10.0% Years 0 1 2 3
Investment cost -$65,000
Sales revenues $73,500 $73,500 $73,500
Operating costs (excl. deprec.) 25,000 25,000 25,000
Depreciation rate = 33.333% 24,500 24,500 21,667
Operating income (EBIT) $24,000 $24,000 $24,000
Taxes Rate = 35% 8,400 8,400 8,400
After-tax EBIT $15,600 $15,600 $15,600
+ Depreciation 24,500 24,500 24,500
Cash flow -$65,000 $40,100 $40,100 $40,100
NPV $34,191