Raph Inc. needs someone to supply it with 500,000 planks of wood per year to support its manufacturing needs over the next four years, and your company has decided to bid on the contract. It will cost your firm $4,000,000 to install the equipment necessary to start production. The equipment will be depreciated using the straight-line method to 0 over the project's life. The salvage value of the equipment is expected to be 0. Your fixed costs will be $1,000,000 annually, and your variable production costs are $10 per plank. You also need an initial investment in net working capital of $1,500,000, which will be recovered at the end of the project. The firm has a tax rate of 21%, and the required rate of return is 10%.

Raph Inc. needs someone to supply it with 500,000 planks of wood per year to support its manufacturing needs over the next four years, and your company has decided to bid on the contract. It will cost your firm $4,000,000 to install the equipment necessary to start production. The equipment will be depreciated using the straight-line method to 0 over the project's life. The salvage value of the equipment is expected to be 0. Your fixed costs will be $1,000,000 annually, and your variable production costs are $10 per plank. You also need an initial investment in net working capital of $1,500,000, which will be recovered at the end of the project. The firm has a tax rate of 21%, and the required rate of return is 10%.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section: Chapter Questions

Problem 14P

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