Question

Dunder-Mifflin, Inc., is analyzing the potential profitability of three printing jobs put up for bid by the State Department of Revenue:


Assume that (1) the company’s marginal city-plus-state-plus-federal tax rate is 50%; (2) each job is expected to have a six-year life; (3) the firm uses straight-line depreciation; (4) the average cost of capital is 14%; (5) the jobs have the same risk as the firm’s other business; and (6) the company has already spent $60,000 on developing the preceding data. This $60,000 has been capitalized and will be amortized over the life of the project.
A. What is the expected net cash flow each year? (Hint: Cash flow equals net profit after taxes plus depreciation and amortization charges.)
B. What is the net present value of each project? On which project, if any, should the company bid?
C. Suppose that Dunder-Mifflin’s primary business is quite cyclical, improving and declining with the economy, but that job A is expected to be countercyclical. Might this have any bearing on yourdecision?


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  • CreatedFebruary 13, 2015
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