McDermott Technologies is evaluating a new project that requires $800.000 in new

Question

McDermott Technologies is evaluating a new project that requires $800.000 in new equipment. McDermott estimates that the new project wil1 generate $900,000 in annual sales at the end of each of the next four years at that operating costs (excluding depreciation) will equal $400,000. Suppose the firm depreciates the equipment using the straight-line method over four years and the firm's tax rate is 40%. If the project s WACC is 10.2%, what is the present value of the project's OCFs? $1.207,160.99 $1,212.413.14 $1.201.946.00 $1.199,352.34 $1,215.053.27 Suppose that HcDermott uses Modified Accelerated Cost Recovery System (HACKS) depreciation rates instead. The applicable rates are 33%, 45%, 15% and 7%, respectively. Recalculate the firm's OCFs and find their present value now (still assuming a WACC of 10 2%). $1,222,380.25 $1.212.315.42 $1.209.820 77 $1,207.334.66 $1.230.020.52

Explanation / Answer

Q1. OCF per year = (Revenue - Cost)(1-Tax) + Tax saving => = (900000 - 400000)(1-0.4) + 800000*0.25*0.40 => = 300000 + 80000 => = 380000 WACC = 10.2% = 0.102 PV of OCFs = 5=380000(1.102^4-1)/(0.102*1.102^4) = 1199352.34 ($) Hence ANSWER is option D : $ 1199352.34 . Q2. OCFs Year1 = (300000+800000*0.33*0.40) = 405600, Year 2 = (300000+80000)*0.45*0.40) = 444000, Year 3 = (300000+800000*0.15*0.40) = 348000, Year 4 = (300000+800000*0.07*0.40) = 322400 . PV = 405600/1.102 +444000/1.102^2 +348000/1.102^3 +322400/1.102^4 = 1212315.42 ($) ANSWER is OPTION B : $ 1212315.42 .

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