You have been asked to assess whether it makes sense for CASTEC INC. to invest in a new telecom investment. The initial investment is expected to be $60 million and the project is expected to generate income for the next 10 years, with the income statement below providing a measure of revenues and expenses for the project. The project is expected to increase working capital investment by an amount equal to 12% of annual revenues. The working capital investment is expected to be recovered at the end of the project. Revenues $28,000,000 Cost of Goods Sold $12,000,000 Operating Expenses $6,000,000 Depreciation $5,000,000 EBIT $5,000,000 -Interest Expenses $2,000,000 EBT $3,000,000 Taxes @ 30% $900,000 Net Income $2,100,000 If the cost of capital for CASTEC INC. is 12% should the company invest in this project? Show all your work and justify your recommendation to receive any credit.
You have been asked to assess whether it makes sense for CASTEC INC. to invest in a new telecom investment. The initial investment is expected to be $60 million and the project is expected to generate income for the next 10 years, with the income statement below providing a measure of revenues and expenses for the project. The project is expected to increase working capital investment by an amount equal to 12% of annual revenues. The working capital investment is expected to be recovered at the end of the project. Revenues $28,000,000 Cost of Goods Sold $12,000,000 Operating Expenses $6,000,000 Depreciation $5,000,000 EBIT $5,000,000 -Interest Expenses $2,000,000 EBT $3,000,000 Taxes @ 30% $900,000 Net Income $2,100,000 If the cost of capital for CASTEC INC. is 12% should the company invest in this project? Show all your work and justify your recommendation to receive any credit.
Chapter9: Capital Budgeting And Cash Flow Analysis
Section: Chapter Questions
Problem 3P
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You have been asked to assess whether it makes sense for CASTEC INC. to invest in a new telecom investment. The initial investment is expected to be $60 million and the project is expected to generate income for the next 10 years, with the income statement below providing a measure of revenues and expenses for the project. The project is expected to increase working capital investment by an amount equal to 12% of annual revenues. The working capital investment is expected to be recovered at the end of the project.
| Revenues | $28,000,000 |
| Cost of Goods Sold | $12,000,000 |
| Operating Expenses | $6,000,000 |
| Depreciation | $5,000,000 |
| EBIT | $5,000,000 |
| -Interest Expenses | $2,000,000 |
| EBT | $3,000,000 |
| Taxes @ 30% | $900,000 |
| Net Income | $2,100,000 |
If the cost of capital for CASTEC INC. is 12% should the company invest in this project? Show all your work and justify your recommendation to receive any credit.
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