Answered: What is the project's outflow at t=0?…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Aero Motorcycles is considering opening a new manufacturing facility in Fort Worth to meet demand for a new line of solar charged motorcycles (who wants to ride on a cloudy day anyway?) The proposed project has the following features;

• The firm just spent $300,000 for marketing study to determine consumer demand (@ t=0).

• Aero Motorcycles purchased the land the factory will be built on 5 years ago for $2,000,000 and owns it outright (that is, it does not have a mortgage). The land has a current market value of $2,600,000.

• The project has an initial cost of $20,902,178 (excluding land, hint: land is not subject to depreciation).

• If the project is undertaken, the company will realize an additional $8,000,000 in sales over each of the next ten years. (i.e. sales in each year are $8,000,000)

• The company’s operating cost (not including depreciation) will equal 50% of sales.

• The company’s tax rate is 35 percent.

• Use a 10-year straight-line depreciation schedule.

• At t = 10, the project is expected to cease being economically viable and the factory (including land) will be sold for $4,500,000 (assume land has a book value equal to the original purchase price).

• The project’s WACC = 10 percent

• Assume the firm is profitable and able to use any tax credits (i.e. negative taxes) .0

What is the project's outflow at t=0? Answer to the nearest whole dollar value.

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