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A gadget production factory will cost $1 million. It is expected to last four years. Depreciation is toward a $200,000 salvage value, which is recovered in the fourth year. For depreciation use the three years MACRS (below). Sales are expected to be $2.0 million per year, with 65% cost of goods sold and $300,000 annual fixed cost in all operating years. Assuming 12% discount rate and 21% tax rate: a. Should the firm accept the project? b. The project will require a working capital commitment of $400,000 in the initial year. Evaluate the project net present value, should the firm accept the project? * 3 Year MACRS Year 1 2 3 4 Allow

A gadget production factory will cost $1 million. It is expected to last four years. Depreciation is toward a $200,000 salvage value, which is recovered in the fourth year. For depreciation use the three years MACRS (below). Sales are expected to be $2.0 million per year, with 65% cost of goods sold and $300,000 annual fixed cost in all operating years. Assuming 12% discount rate and 21% tax rate: a. Should the firm accept the project? b. The project will require a working capital commitment of $400,000 in the initial year. Evaluate the project net present value, should the firm accept the project? * 3 Year MACRS Year 1 2 3 4 Allow

EBK CONTEMPORARY FINANCIAL MANAGEMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN:9781337514835
Author:MOYER
Publisher:MOYER
Chapter10: Capital Budgeting: Decision Criteria And Real Option
Section: Chapter Questions
Problem 3P
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A gadget production factory will cost $1 million. It is expected to last four years. Depreciation is toward a $200,000 salvage value, which is recovered in the fourth year. For depreciation use the three years MACRS (below). Sales are expected to be $2.0 million per year, with 65% cost of goods sold and $300,000 annual fixed cost in all operating years. Assuming 12% discount rate and 21% tax rate: a. Should the firm accept the project? b. The project will require a working capital commitment of $400,000 in the initial year. Evaluate the project net present value, should the firm accept the project? * 3 Year MACRS Year 1 2 3 4 Allowance 33 44 15 8

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